TAXATION OF SPECIAL INDUSTRIES LESSON SIX

This covers mainly the taxation of special entities namely, Insurance Business, Retirement
Savings, Charitable Organization and Clubs and Trade Association

INSURANCE BUSINESS
Introduction
Income and expenditures of an insurance business are unique to those of other most
common business e.g. trading and manufacturing. Moreover, the operations of insurance
business are a little bit unique as compare to many other common businesses. Therefore, we
need income computation rules that may cater for the unique characteristics of insurance
business. This lesson discusses specific rules related with computation of chargeable business
income in respect of General Insurance Business and Life Insurance Business.

Definitions
‘Insurance Business’ means the business of an insurer in effecting, issuing and carrying out
insurance
General Insurance Business’ means any insurance that is not life insurance;
Life Insurance Business (According to Income tax of 2004) means the business of an insurer in
effecting, issuing and carrying out life insurance.
Life insurance business means insurance of any of the following classes:
(a) Insurance where the specified event is the death of an individual who is the insured or an
associate of the insured;
(b) Insurance where -
i. The specified event is an individual who is the insured or an associate of the insured
sustaining personal injury or becoming incapacitated; and
ii. The insurance agreement is expressed to be in effect for at least five years or without
limit of time and is not terminable by the insurer before the expiry of five years except
in circumstances prescribed by the regulations
(c) Insurance under which an amount or series of amount is to become payable to the insured
in the future.
(d) re-insurance of insurance referred to under paragraphs (a) to (c)

Taxable Income from General Insurance Business

As per sec 58(2) general insurance business includes the following:
(i) Premiums derived during the year of income by the person as insurer, including as re-
insurer, in conducting the business; and
(ii) Proceeds derived during the year of income by the person under any contract of the re-
insurance in respect of proceeds referred to in paragraph (b)(i)

1|Page
BUT the following should be deducted:
(i) Proceeds incurred during the year of income by the person as insurer, including as re-
insurer, in conducting the business; and
(ii) Premiums incurred during the year of income by the person under any contract of re-
insurance in respect of proceeds referred to in subparagraph (i)

Calculation of Tax Liabilities for General Insurance Business

When calculating income from General Insurance Businesses, all premiums derived during the
year of income by the person as insurer, including as re-insurer, and proceeds derived
during the year of income by the person under any contract of re-insurance should be included
in the person’s income.
Likewise, the persons should deduct proceeds incurred during the year of income by the
person as insurer, including as re-insurer and premiums incurred during the year of income
by the person under any contract of re- insurance (Section 58(2)). Furthermore, the insurance
company may deduct ordinary business expenses and commissions.

Income from general insurance business (During a Year)

Premiums received by the person as insurer, re-insurer
Add: Proceeds from re-insurance
Less: Proceeds you pay out as insurer or re-insurer
Any premiums paid to re-insurers where you take out re-insurance
Ordinary business expenses and commissions

Example 1
R Insurance Company Ltd is carrying on general insurance business. The company also re-
insures certain risks in Company A outside the United Republic of Tanzania. The financial
statements of R Insurance Company for the year 2017 showed the following:
i. Total premium derived Tshs.5,200 million, this amount included Tshs.400 million
premium received during a year of income which will cover risks for a period after the
end of year 2017 (unexpired risks).
ii. Outwards reinsurance was Tshs.2,500 million.
iii. Rental income was Tshs.100 million.
iv. Interest on deposits with the financial institutions Tshs.100 million.
v. Gross claims incurred were Tshs.1,100 million; this included claims that were incurred
but not reported of Tshs.600 million.
vi. Commission payable Tshs.700 million.

2|Page
 vii. Operating and other expenses incurred in conducting the insurance business Tshs.200
million.
viii. Reinsurance proceeds received during the year from Company A were Tshs.500 million.

Required:
Calculate the taxable income of R Insurance Company for the year of income 2017

Solution
Note: The income derived or loss incurred from conducting general insurance business shall
be calculated separately from the income or loss from any other activities of the person

Tshs in million
Premiums derived as insurer*(5,200ml=-400ml/=) 4,800

Proceeds derived from reinsurance 500

Total Income 5,300

Less:
Premiums incurred on re-insurance 2,500
Claims paid (Proceeds incurred) 1,100
Expenses 200
Total Deductions 3,800
Income from Insurance Activity 1,500
Commissions Payable (700)
Taxable Insurance Income 800
Interest income 100
Rental income 100
Total Taxable Income 1,000

Premium paid for un-expired risks are disregarded for this year and will be included in the
following year. The outward reinsurance that R Company Ltd Paid to A Company (non-resident)
in subject to withholding tax of 5% as per the requirements of section 83(1)b) read together
with the first schedule of the income Tax act para 4(c)(iii).

3|Page
Special Rules Related With Computation of Taxable of a Person Running Life Insurance
Business
Definitions
‘Life insurance’ means insurance of any of the following classes:
(a) Insurance where the specified event is the death of an individual who is the insured or an
associate of the insured;
(b) Insurance where:
(i) the specified event is an individual who is the insured or an associate of the
insured sustaining personal injury or becoming incapacitated; and
(ii) the insurance agreement is expressed to be in effect for at least five years or without
limit of time and is not terminable by the insurer before the expiry of five years
except in circumstances prescribed by the regulations;
(iii) insurance under which an amount or series of amounts is to become payable to
the insured in the future; and
(iv) Re-insurance of insurance referred to under paragraphs (a) to (c).
Life insurance business’ means the business of an insurer in effecting, issuing and carrying out
life insurance

Calculation of Tax Liabilities for Life Insurance Business

The calculation of income from life insurance business should not include premium derived
during the year of income by the person as insurer, including as re-insurer and proceeds
derived during the year of income by the person under any contract of re-insurance (Section
59(1)). Likewise, no deduction or inclusion in the costs of assets or liability of proceeds
incurred during the year of income by the person as insurer, including as re-insurer and
premiums incurred during the year of income by the person under any contract of re-
insurance is allowed (Section 59(2)). However the insurance company may deduct ordinary
business expenses and commissions

Example 1
K Insurance Company is conducting a life insurance business. K Company re-insured some of
the policy risks with Company M. In addition K Company has made investments in buildings,
which are being rented, and Treasury bills which matured in the year 2017. The financial
statements of K. Company for the year of income 2017 showed the following information:
i. Total premiums derived for life insurance policies were Tshs 900,000,000
ii. Total proceeds incurred were Tshs. 400,000,000.
iii. Total proceeds derived from Company M. were Tshs.200,000,000 while total
premiums incurred under the contract of reinsurance were Tshs. 50,000,000,
iv. Management expenses were Tshs. 20,000,000.
4|Page
 v. Interest derived from Treasury bills were Tshs. 50,000,000 and rental income
received was Tshs. 500,000,000 expenses incurred in earning the rental income were
Tshs. 50,000,000 and commission paid for obtaining tenants Tshs 50,000,000

Required:
Calculate the taxable income of K Insurance Company for the year 2017.

Solution:
Note: The income derived or loss incurred from conducting life insurance business shall be
calculated separately from the income or loss from any other activities of the persons.
The premiums and proceeds derived during the year and proceeds and premiums incurred
shall not be used in calculating the income of K. Insurance (as per section 59(2)(a) Company
for the year of income 2017 from a life insurance business. So in this case only income from the
Company’s investments will be calculated for the year of income 2017 allowing all the
management expenses (section 59(2) (b)).

Inclusions
Interest income 50,000,000

Rental income 500,000,000

Total investment income 550,000,000

Less: Deductions
Expenses incurred in earning the rent income 50,000,000

Commission paid or obtaining tenants 50,000,000

Management expenses 20,000,000

Taxable Income from Life Insurance Business 430,000,000

5|Page
TAXATION OF RETIREMENT FUND
Retirement funds accept individuals’ money contributions invest them and promise the
individual to receive a sum of money and/or series of payments upon retirement. Through
investments of the individuals’ contributions, retirement funds make profits which should be
taxed. This section explains taxation rules of retirement funds.

Meaning of Retirement Funds

A retirement fund is any entity established and maintained solely for the purposes of
accepting and investing retirement contributions in order to provide retirement payments
to individuals who are beneficiaries of the entity.

Types of Retirement Funds

There are two (2) categorizes of retirement funds namely as Approved or Unapproved.
 Approved Retirement Fund is a resident retirement fund approved by the
Commissioner by a notice in writing.
 Unapproved Retirement Fund is defined as retirement fund that is not an approved
retirement fund.

General Principles on Taxability of Retirement Funds

There are some differences between approved pension funds and other businesses on how they
compute their Taxable Revenues and Deductible Expenses. In the case of taxable revenue,
Retirement Contributions received by a retirement fund are not taxable (Section 62(2)). On
the other hand, Retirement Payments made by the fund are not deductible, and are not
included in the cost of any asset or liability of the fund (Section 62(2)).

Example 1
The following information relates to the financial data of Joseph Pension fund for the year
ending 2012. Your duty is to determine the tax liabilities of the company for that year

Tshs
Retirement Contribution 6,000,000

Investment Income 2,000,000

8,000,000

6|Page
 Retirement Payments 1,000,000

Management Expenses 2,000,000

Depreciation Allowance as per ITA C 1,000,000

4,000,0000
Income Before Tax
Soln
Tshs

Profit as per Account 4,000,000

Add: Non Allowable Expenses

Retirement Payment 1,000,000

Less: Non-taxable income Retirement contribution (6,000,000)

1,000,0000
Taxable Loss

Taxation Rules of Approved Retirement Funds in the Year they Cease to be Approved
When an approved retirement fund ceases to be an approved retirement fund during a Year of
Income, its income tax payable for the year of income should be increased by an amount equal
to the income tax rate applicable to corporations; applied to:

 All retirement contributions received by the fund from or on behalf of resident

individuals and
 total income of the fund during the period from its most recent approval as an
approved retirement fund to when it ceased to be so approved,
LESS;
 All retirement payments made by the fund from its most recent approval as an
approved retirement fund to when it ceased to be so approved in respect of individuals
who were resident during that period (Section 62(3)).

Example
Jojo Pension Fund was an unapproved pension fund established in year 2000 and in year 2013
the Fund was approved by the Commissioner as an approved pension fund. In September,
Year 2015 the Fund ceased to be an Approved Pension Fund.
During year 2015, it received contributions on behalf of resident individuals at the rate of
Tshs. 200,000,000 per month a n d other contributions to the Fund from non-residents were at
7|Page
the rate of Tshs.100,000,000 per month. The retirement payments made before September
2015 were Tshs. 200,000,000, but during the year Tshs.450,000,000 retirement payment
were made to the resident individuals. Jojo Pension Fund also received rent of Tshs.
90,000,000. Minor repairs were made to the rented building of Tshs. 2,500,000 and security
expenses paid of Tshs.600,000. Administrative expenses were Tshs. 35,000,000. The Fund’s
accounting date is 31 st December.
Required:
Calculate the total tax payable in year 2015.

Answer
Income of the fund
Investment income
Rent received 90,000,000
Less: Repairs 2,500,000
Security 600,000 3,100,000
Net investment income 86,900,000 (i)
Contributions (October – December 15)
From resident individuals

(200,000,000 x 3) 600,000,000
Other contributions (100,000,000 x 3) 300,000,000
Total Contributions 900,000,000 (ii)
Retirement payments
Total payments 450,000,000
Made before October 15 200,000,000
Difference 250,000,000
Difference in income tax payable (sec.62 (a) and (b))

= 900,000,000 – 250,000,000 = Tshs. 650,000,000

Total income Tshs.86,900,000 + 650,000,000 = Tsh.736,900,000

Total tax at 30% (736,900,000) = 221,070,000

8|Page
TAXATION OF CHARITABLE BUSINESS
Charitable organizations as well as Religious organizations generate income with a primary
objective of advancement of public well-being by providing charitable services. However,
charitable organizations may be used to avoid tax if they are completely not taxable. A
person may transfer income to charitable organizations and then withdraw from them in form of
charitable services. In order to circumvent tax avoidance practices, charitable organizations as
well as religious are both taxable. This part introduces discussion on the rules for taxation of
Charitable and Religious Organizations

Definition
As per sec 64(8) Charitable Organization or Religious Organization means a resident entity of a
public character that satisfies the following conditions:
(a) The entity was established and functions solely as an organization for:
(i) The relief of poverty or distress of the public
(ii) The advancement of education
(iii) The provision of general public health, education, water or road construction or
maintenance; and
(b) The entity has been issued with a ruling by the commissioner under section 131 currently
in force stating that it is a charitable organization or religious organization.

Taxation Principles of Charitable or Religious Organization

For taxation purposes, every charitable or religious organization approved by the
Commissioner General, is deemed to be conducting business. For the purposes of calculating
the income of a charitable organization or religious organisation for any year of income from its
charitable business –
(a) there shall be included, together with any other amounts required to be included under
other provisions of the Income Tax Act, all gifts and donations received by the
organisation or religious organisation; and
(b) there shall be deducted, together with any other amounts deductible under other
provisions of the Income Tax Act-
(i) amounts applied in pursuit of the organisation or religious organisation’s
functions
(ii) 25 percent of the organisation or religious organisation’s income from its
charitable business (calculated without any deduction under subparagraph (i))
and any investments

Savings for Implementations of Future Projects

9|Page
Saving of funds for a project that is detailed in material particulars of the trust income for
future application to the charitable functions of the organization is acceptable subject to the
approval of the Commissioner General. Where the Commissioner is satisfied and grants an
approval the income saved will be treated as an expenditure incurred for charitable purposes
– therefore allowed for deduction in computing charitable business income.

Taxation Rules when Charitable Organisation or Religious Organization Ceases to be

Charitable
Where a charitable organization or religious organization carrying on charitable business ceases
to be a charitable organization or such religious organization during a year of income the
charitable organization or religious organization shall be treated as conducting a business other
than its previous charitable business.

The organization after cessation will include in calculating the organization’s income for the
year of income from business any amount claimed as a deduction when calculating the
income from the charitable business that is, the retained 25 percent of the charitable business
income and any investment income during that year of income or any prior year of income
during which the organization was a charitable or religious organization carrying on charitable
business

Example
M Trust, a charitable organization, was established in Tanzania in the year 2015 had income
from a business of Tshs.15,000,000 of which Tshs.12,000,000 was applied toward the functions
of the organization. Since the balance of the income of Tshs 3,000,000 was less that 25 percent
of the total income the amount was not taxed. During the year 02 the organization derived
taxable income of Tshs.25,000,000 of which Tshs.10,000,000 was applied towards its
functions. The organization applied to the Commissioner to be allowed to save Tshs.
9,000,000 to be applied towards its functions in the year 2017. The Commissioner allowed
the savings of the amount. The balance of Tshs. 6,000,000 which is, Tshs.25,000,000 less
(Tshs. 10,000,000 + 9,000,000), being 24% of Tshs 25,000,000 were not taxed. The
organization ceased to be a charitable organization in the year 2017 before applying to its
functions the amount of Tshs.9,000,000 saved from its charitable business in the year 2016.

The taxable income of the organization for the year 2017 when it ceased to be a
charitable organization is calculated as follows:

Income from its business in year 2017 Tshs.16,000,000

Add:

Exempt amount in year 2015 - Tshs. 3,000,000

10 | P a g e
 Exempt amount in year 2016 - Tshs. 6,000,000

Exempt amount in year 2017 - Tshs. 9,000,000 Tshs.18,000,000

Taxable income of the organization for the year of income 2017 Tshs. 34,000,000

Question
The income of a trust from a property held for charitable or religious purposes is Tshs.
15,000,000. Besides the trust has received Tshs. 4,000,000 by way of voluntary contributions, it
is assumed that the income applied for the purposes of the trust is Tshs. 10,000,000. The trust
applied to the Commissioner General to be allowed to save Tshs 1,000,000 to be applied
towards its functions in the following year. The Commissioner General approved the saving.
Required
Calculate the tax liability of this organization as per Income Tax Act, Cap 332

TAXATION PRINCIPLES OF CLUBS AND TRADE ASSOCIATIONS

Introduction
A club, association or similar institution is formed not for commercial purposes but for
social, recreational, science, sports, arts, literature or other leisure pursuits for the interest
and benefit of their members. Examples of such club, association or similar institution
include an athletic club, an antique car collectors club and a historical society.
However, the activities of some clubs, associations or similar institutions are trade dealings
which are conducted for a profit that is subject to tax as business profits such as a fitness
centre or a professional football club. Where a person carries on a club, association or similar
institution which receives from its members not less than seventy five percent (75%) of its
Gross Receipts on Revenue Account (including Entrance Fees and Subscriptions), such
person shall be deemed not to carry on a business; but where less than 75% of its Gross
Receipts are received from members, the whole of the income from transactions both with
members and others (including entrance fees and subscriptions) shall be deemed to be receipts
from a business, and such person shall be chargeable in respect of the profits therefrom.
This lesson provides taxation principles of clubs and trade associations.

Meaning of a Club and Trade Association

Members’ club means a club or similar institution all the assets of which are owned in
common by or held in trust for the members thereof;
Member means –
 in the case of a club or similar institution, a person who, while a member, is entitled to
an interest in all the assets of the club or institution in the event of its liquidation or who
is entitled to vote at a General Meeting of the club or institution; and

11 | P a g e
  in the case of a trade association, a person who is entitled to vote at a General Meeting
of the association; and
Trade Association means any association of persons-
(a) That are all separately engaged in a particular type of business; and
(b) Formed with the main object of safeguarding or promoting the business interests of
such persons

Taxation Principles
The activities of a club, trade association or similar institution shall be treated as a business and
for the purposes of calculating the club, association or institution’s Income for a Year of
Income from that business there shall be included, together with any other amounts to be
included under other provisions of the Income Tax Act,
(i) Entrance fees,
(ii) Subscriptions and
(iii) Other amounts derived from members during the year of income.

Where three-quarters (¾) or more of the amounts to be included in calculating the income of a
members club or trade association for a Year of Income from the business are derived from
members of the club or association, the income from that business shall be exempt and shall
not constitute chargeable income of the club or association. This means that in case the
contributions and amounts derived from the members for a Year of Income are less than three
quarters (¾) of the income, the whole of the income will be subjected to taxation at the
Corporation Taxation Rate.

Example
Majiyakunde is a members’ club, which has 150 members. For the year of income 2017, each
member subscribed 150,000/= total subscriptions for t h e year were Tshs 22,500,000. Out of
the 150 members, 50 were new and paid entrance fee of Tshs 20,000 each in year 2017. Total
entrance fees paid were Tshs 1,000,000. The club was operating a gym which collected fees
from non members only, and for that year, Tshs 10,000,000 was paid. The club was running a
bar where all types of drinks were sold. The profit obtained from this business was Tshs
15,000,000. Only members were allowed to buy drinks from the bar. At the end of the year the
Club organized an- end- of- the- year Dinner & dance, tickets were sold for Tshs 25,000 per
couple. All members attended. Some non members were also invited and total collections from
tickets were Tshs 5,000,000
During the year some repairs were made to the club assets for a total of Tshs 3,000,000,
Salaries paid to club employees were Tshs 9,600,000 and other club expenses were Tshs
600,000
Required
Calculate the taxable income and income tax payable of Majiyakunde

12 | P a g e
Answer
Calculation of the income of the club for the year 2017 will be as follows
Receipts from members Tshs
Subscriptions 22,500,000
Entrance fees 1,000,000
Profit from the bar club 15,000,000
Dinner and dance tickets 3,750,000
Total 42,250,000
Receipts from non-members
Gym fees 10,000,000
Dinner and dance tickets 1,250,000
Total 11,250,000
Total receipts 53,500,000

 42,250,000 of 53,500,000 = 78.9%

The total contributions from members are more than 75% of the total receipts; therefore the
total receipts of the club are exempted from income tax, as provided for under section 65(2) of
the Income Tax Act.

Example
Taking the example of Majiyakunde Members’ club in example 1 above, assume that the
total contributions from, the members was Tshs 12,500,000. Profits from Club bar was
contributed by Tshs 12,000,000 by members and Tshs 3,000,000 by non-members. Collected
fees from gym Tshs 20,000,000. The contribution of the Club from the members will be as
follows;

Receipts from members Tshs

13 | P a g e
 Subscriptions 12,500,000
Entrance fees 1,000,000
Profit from the bar club 12,000,000
Dinner and dance tickets 3,750,000
Total 29,250,000
Receipts from non-members Tshs
Gym fees 20,000,000
Dinner and dance tickets 1,250,000
Profit from the bar club 3,000,000
Total 24,250,000
Total receipts 53,500,000

Tshs 29,250,000 of 53,500,000/= is 54.67%. This is less than 75% of the total contributions by
members, therefore the total receipts will be taxed at the corporation tax rate after allowing the
clubs expenses as follows;

Total receipts 53,500,000

Less:
Repair 3,000,000
Salaries 9,600,000
Other club expenses 600,000 13,200,000
Taxable income 40,300,000

Therefore Tax liability = 30%* 40,300,000= 12,090,000

Question
Yanga Sports Club is a Tanzania Club with Head Quarters in Dar es Salaam at Jangwani Street.
It has a lot of Members who contribute and Donate to the Club. For a number of years now,
the Club has not paid tax to TRA due to absence of an Accountant to prepare the Financial
Statement professionally. Assume you are an employee (Accountant) of the Club and you given
the following data collected for the year of Income ended on 31/12/2018
Subscriptions (Membership Fees) 7,500,000

14 | P a g e
 Competition proceeds-(from non-members) 5,000,000
Sundry Receipts (from non-members) 5,000,000
Donations from Members 20,000,000
Entrance fees during the matches (1/4 from members) 10,000,000
Receipts for hiring the Clubs’ football pitch to third parties 2,500,000
Competition expenses 500,000
Fees paid to KK – Security services during the matches 2,000,000
Tournaments (Prizes costs) 500,000
Wages and Salaries 5,000,000
Stationeries postages 200,000
Depreciation of the Club’s Assets as per Income Tax Act, Cap 332 250,000
Telephone charges for both International and local 250,000
Bank charges 150,000
Transportation charges 2,500,000
Expenses for up-keeping the football pitch 500,000
Coach hiring expenses 1,500,000
Surgery Dispensary Expenses 1,000,000
Life Insurance Premium paid for players 2,500,000
Utensils and other Culturing expenses during the friend Matches 500,000
Auditing fees 1,500,000
Required: Compute the Taxable Income of Yangs Sports club for the year income ended on
31/12/2018 as per section 65 of the Income Tax Act Cap 332

Solution
Income from Members

Subscriptions (Membership Fees) 7,500,000

Donations from Members 20,000,000
Entrance fees during the matches (1/4 of Tshs 10,000,0000) 2,500,000
Receipts for hiring the Clubs’ football pitch to third parties 2,500,000
32,500,000

15 | P a g e
Income from Non- Members

Competition proceeds-(from non members) 5,000,000

Sundry Receipts (from non members) 5,000,000
Entrance fees during the matches (3/4 of Tshs 10,000,000) 7,500,000
17,500,000
Total receipts 50,000,000
 Tshs 32,500,000 of 50,000,000/= is 65%. This is less than 75% of the total contributions
by members, therefore the total receipts will be taxed at the corporation tax rate after
allowing the clubs expenses as follows;

Total receipts 50,000,000

Less: Expenses
Competition expenses 500,000
Fees paid to KK – Security services during the matches 2,000,000
Tournaments (Prizes costs) 500,000
Wages and Salaries 5,000,000
Stationeries postages 200,000
Depreciation of the Club’s Assets as per Income Tax Act, 250,000
Cap 332
Telephone charges for both International and local 250,000
Bank charges 150,000
Transportation charges 2,500,000
Expenses for up – keeping the football pitch 500,000
Coach hiring expenses 1,500,000
Surgery Dispensary Expenses 1,000,000
Life Insurance Premium paid for players 2,500,000
Utensils and other Culturing expenses during the friend 500,000
Auditing fees 1,500,000 (17,350,000)
Taxable Income 32,650,000

Taxable income is TZS 32,650,000

16 | P a g e