consideration” means a consideration, having an ascertainable money value, which passes from lessee to lessor, whether in cash or otherwise. Lease Premiums Cont’d Characteristics of a Premium: be distinct in nature
have an ascertainable money value
pass from lessee to lessor or sub-lessee
to sub-lessor but not to predecessor lessee. be paid in addition to or in lieu of rent. Lease Premiums Cont’d Is a price for the ‘right of use’ of: a) Land or buildings b) Plant or machinery c) Patent, design, trade mark, copyright, model, plan, secret process or formula d) Motion picture film or television, sound recording or advertising matter e) Imparting of or undertaking to impart knowledge for the use of movable or intangible assets mentioned above Section 12(4) This section deems lease premiums received for the right of use of: patents, design, trademark, copyright, model, plan, sound recording or advertising matter secret process or formula motion picture film or television etc. in Zimbabwe, to be from a source within Zimbabwe. Lease Premiums Cont’d Gross Income – Section 8(1)(d) Tax in full in year of accrual
Deduction Section 15(2)(d)
Must be used / occupied for the purposes of trade or in the production of income (apportion between business and private use) Yearly allowance is the Lease Premium divided by the period of lease or 10 years whichever is the lesser. Lease Premiums Cont’d Deduction Section 15(2)(d)
LEASE PREMIUM The Lesser of ‘Lease Period’ & 10 Yrs
Note: This must be expressed in
months Lease Premiums Deds
If the lease period is not stated use 10
years Where the lease period may be extended only the initial period is used in the calculations In the year in which the lease commences, terminates or on cessation of use for business apportion the allowance Example Bie entered into a 15 year lease agreement with Sisco Ltd , the owner of industrial buildings. The lease agreement provided for the payment by Bie of a lease premium amounting to $ 60 000 on 1 March 2023 and monthly rentals of $700 from that date. COMPUTE Sisco’ s taxable income and amounts claimable by Bie for the year ended 31 Dec 2023 Lease Premiums Deds
On acquisition of ownership the lessee
will cease to qualify for any allowance in the year of assessment next following Consider recoupment to the lessee in terms of Section 8(1)(l) Lease Improvements Generally if a property is let out it’s normally the lessor who effects improvements. This section looks at a situation where, in terms of an obligation in the lease agreement, the lessee effects improvements on the lessor’s property The cost of the improvements is not reimbursed by the lessor Lease Improvements Cont’d Lease improvements refer to, in the case of the : a) lessor, to the value of improvements on and b) lessee to the cost of improvements incurred on
land or buildings, effected by the lessee,
where there is an obligation in terms of the lease agreement, to effect those improvements. Lease impvts Where agreement stipulates that improvements to the value of $200 000 are to be effected it is this amount which is considered as the value for lease improvements, if the actual cost rises to $350 000 the extra $150 000 is voluntary on the part of the lessee and falls outside the ambit of S8(1)(e). Lease impvts If, on the other hand, the lease requires the erection of a specified improvement to a stated minimum value, the amount under S8(1)(e) will be a fair and reasonable value usually the cost incurred and not merely the minimum amount stated. This is because the lessee must meet the lessor’s requirements even if the cost exceeds the stated minimum. NB: Before any amount is taxed in terms of this section it must be clear that there is a legal and enforceable obligation to effect the improvements. Lease Improvements Cont’d Section 8(1)(e) brings into the lessor’s Gross Income, the value of improvements effected by the lessee in terms of an obligation in the lease agreement granting the right of use of land or buildings. The section is complementary to section 15(2)(e) which allows expenditure incurred by the lessee as a deduction. Lease Improvements Cont’d
a) The date of accrual of the lease
improvements is the date such improvements were effected or completed. b) The amount is taxable in equal monthly instalments over the unexpired period of the lease Lease Improvements Cont’d
Unexpired lease period =
Actual lease period xxxxxx
Less: Up to end of construction period xxxxxx xxxxxx
Note: This must be expressed in
months Lease Improvements Cont’d
c) If the period of the lease is indefinite
or silent then it is deemed to be 10 years which is further reduced to determine the unexpired lease period d) Where the lease is renewable only the initial period of the lease is taken into account Lease Improvements Cont’d e) It is also important to note that an upward variation in the building clause prior to completion of the improvements would result in the revised amount being captured by Section 8(1)(e) in full
f) If the variation of the building clause takes
place after the completion of the improvements the additional amount cannot be included in the gross income of the lessor Lease Improvements Cont’d
CIRCUMSTANCES WHERE ALL FUTURE INSTALMENTS
ARE BROUGHT INTO GROSS INCOME
a) On cancellation of the agreement
b) On cession of the agreement c) On assignment of the agreement d) On sale or any other form of disposal of the land or buildings on which the improvements were effected e) On death or insolvency of the lessor Lease Improvements Summary
a) Where the lease period is given the allowance shall
be equal to: LEASE IMPROVEMENTS The lesser of the UNEXPIRED LEASE PERIOD & 10 Yrs b) Where the lease period is not given the allowance shall be equal to: LEASE IMPROVEMENTS 10 Yrs – period up to end of construction Lease Improvements - Deductions
Section 15(2)(e) allows a deduction
in the hands of the lessee the cost of the improvements effected by him in terms of an obligation in the lease agreement granting the right of use of land or buildings. Lease Improvements Deds
a) The date on which capital expenditure
shall be assumed to have been incurred on the lease improvements is the date such improvements are used by the lessee for the purposes of trade. b) The amount deductible shall be in equal monthly instalments over the unexpired period of the lease Lease Improvements Deds
Unexpired lease period =
Actual lease period xxxxxx
Less: Period to date of business use xxxxxx xxxxxx
Note: This must be expressed in
months Lease Improvements Deds
c) If the period of the lease is indefinite
or silent then it is deemed to be 10 years which is further reduced to determine the unexpired lease period d) Where the lease period is renewable only the initial period of the lease is taken into account Lease Improvements Deds e) It is also important to note that an upward variation in the building clause prior to completion of the improvements would result in the revised amount being captured by Section 15(2)(e) in full
f) If the variation of the building clause takes
place after the completion of the improvements the additional amount cannot be included for the purposes of calculating the deductible amount in the lessee’s hands Lease Improvements Deds
g) In the year in which the lease
commences, terminates or on cessation of use for business apportion the allowance h) On acquisition of ownership the lessee will cease to qualify for any allowance in the year of assessment next following Lease Improvements Deds
i) Consider recoupment to the
lessee in terms of Section 8(1)(l)
j) Where there is dual usage
apportion between business and private Lease Improvements Summary
a) Where the lease period is given the allowance shall
be equal to: LEASE IMPROVEMENTS The lesser of the UNEXPIRED LEASE PERIOD & 10 Yrs b) Where the lease period is not given the allowance shall be equal to: LEASE IMPROVEMENTS 10 Yrs – Period up to date of business use Example Mrs Chikore leases her property to Mr Jongwe. The lease was entered into in 1 March 2023 and the lease is for 8 years. Mr Jongwe was asked to pay monthly rentals of $10 000 and in addition effect improvements to the value of at most $260 000. The buildings were completed on 31st July 2023. Assume the buildings were put into use by the lessee on 1Oct 2023. Compute Mrs Chikore’s taxable income for 2023 and Mr Jongwe’s allowable deductions Assuming the lease agreement is cancelled on 1 Jan 2024. How much is gross income for Mrs Chikore. Elections In terms of Section 15(4) of the Income Tax Act, if a deduction is allowed under two or more sections, the taxpayer shall elect under which section he wants the deduction allowed. The taxpayer has the right to choose between capital allowances and a deduction under Section 15(2)(e). Elections Cont’d Where the erection is not in terms of an obligation in the lease a) Lessee - Allow special initial and wear and tear allowances b) Lessor - No special initial and wear and tear allowances until property is rented out to another tenant and rent is thus receivable for the building Elections Cont’d Where the erection is in terms of an obligation in the lease a) Lessee - Special initial and wear and tear allowances allowable if elected as an alternative to section 15(2)(e). b) Lessor - Wear and tear allowances only. Elections Cont’d Where the erection is in terms of an obligation in the lease and the cost exceeds the stipulated amount a) Lessee - Special initial and wear and tear allowances on the whole or the stipulated part as an alternative to section 15(2)(e) or on the excess if section 15(2)(e) allowance is taken. b) Lessor - wear and tear allowance on the stipulated amount but not on the excess until the property is re-let to another tenant. Example Wisdom Ltd entered into a 30yr operating lease with Mpofu Ltd for the leasing of an industrial site. This lease agreement stipulated that Wisdom Ltd would pay a premium of $20 000 on 1 July 2023 and would then erect a factory on the site at a cost of $265000. From July 2023, the company would pay a monthly rental of $2000 subject to a 10% increase the following year. The erection of the factory commenced on August 2023 and was completed on 31 October 2023 at a cost of $325 000 CONTD Show the lessor and lessee’s positions in 2023 and in 2024 if the lessee claims lease allowances as an alternative of capital allowances. Compute Wisdom’s allowances if he claims capital allowances as an alternative to lease allowances. RECAP The value of the lease improvements must be agreed upon before construction commences otherwise any subsequent variation in value is not accepted unless it is ratified before completion of construction. If the value is not stated in the contract, the value is what the commissioner generally considers fair and reasonable, usually the actual cost If agreement states the minimum value of the impvts, its the value shall be the higher of the minimum stated and the actual cost incurred. Cont’d If the lease term is renewed, impvts will be assessed on the initial on the initial lease term. If no lease period is stated or is for an indefinite period, the period is restricted to 10 years.
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