Topic 4 - Taxation of Investment Income

DAR ES SALAAM CPA REVIEW CENTER B4&C4-Public Finance Taxation & Advanced Taxation CPA (T) DAVID D KIWIA
INVESTMENT INCOME
Key Definition
i) Investment
Investment means owning one or more assets of similar nature to earn income or appreciation of
value.
ii) Investment Asset
Investment Asset" means shares and securities in a corporation, a beneficial interest in a non-
resident trust and an interest in land and buildings.
But does not include -
(a) Business assets, Depreciable assets and trading stock;
(b) A private residence of an individual that has been owned continuously for three years or more
and lived in by the individual continuously or intermittently (on/off) for a total of three years or
more, with realized for a gain of Ths 15,000,000 or less.
Conditions
• House must be private resident of individual (owner should be an individual)

• The individual must own the house for at least 3 years
• The individual must have lived in the house for at least 3years continuous or intermittently
• Realization gain of not more than Tshs 15,000,000
(c) An interest in land held by an individual that has a market value of less than 10,000,000
shillings at the time it is realized and that has been used for agricultural purposes for at least two
of the three years prior to realization;
(d) Shares and securities listed on the Dar es Salaam Stock Exchange that are owned by a resident
person or a nonresident person who either alone or with other associate controls less than 25%.
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Kiwia, David D. CPA-T, BAF, MFA-OG, PhD - Finance (IP) kiwiadavid09@gmail.com +255 716 734 577
INVESTMENT INCOME
Includes all gains and profits obtained by person during the year of income from conducting
investment.
AMOUNT TO BE INCLUDED SEC 9(2)
a) Dividend, Interest, rent, loyalty, natural resources payment, distribution of a trust, gain of
an insured from life insurance, Gain from unapproved retirement fund.
b) Gain on realization of Investment Assets.
c) Amount derived as a consideration on acceptance of restriction to conduct investment
d) Any other amount required to be included under other provision of ITA.
I. DIVIDEND
Dividend is the return or reward for owning shares.
Sec 82(1) dividend is a withholding payment ie the one paying dividend shall withhold tax at the
rate provided under paragraph 4(4) of the 1st Schedule ie 10%.
Dividend shall be included in total income for tax purpose but with consideration of the following:
Sec 54(10 Dividend distributed by:
a) A resident corporation shall be taxed in the hand of recipient as a final withholding

payment.
b) A non-resident corporation shall be included in the income of the recipient.
Sec 86(1) Dividend distributed by
a) A resident corporation
b) A non-resident corporation to a resident individual other than dividend received in
conducting business shall be final withholding payment.
Summary Table
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Dividend Source To Impact

Corporation -Resident
FWP
-Non Resident
To a Resident Individual in conducting
Resident Corporation FWP
investment
To an Individual in conducting business NFWP
To a Non Resident Individuals NFWP
Corporation -Resident
NFWP
-Non Resident
To a Resident Individual in conducting
Non Resident Corporation FWP
investment
To an Individual in conducting business NFWP
To a Non Resident Individuals NFWP
Sec 54(2) Dividend distributed by a resident corporation to another resident corporation, where
the receiving company control 25% or more pf the equity shares of the issuing company, shall be
taxed at the rate provided under paragraph 4(4) of the 1st schedule ie taxed at the rate of 5% - final
withholding tax.
Summary
• From Resident Corporation to Resident Corporation

• Owning more or equal to 25% of share equity
• Taxed at 5% FWP
II. INTEREST
Interest is the payment for use of money of another person.
The lender receive interest as income.
This is withholding payment Sec 82(1)
The one paying interest shall withhold tax at the rate of 10%
Note that: the payer must be a resident person so that he or she can withhold tax.
The amount of interest received shall be included in the income of recipient by considering the
following:
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Sec 86(1) (b) Interest received from financial institution by resident individual in respect of deposit
shall be final with holing payment except
i) Interest is received in conducting business

ii) Foreign sourced income received by a resident individual referred under sec 6(2) ie
have been in URT for 2years or less.
Summary Table
Dividend Source To Impact

To a Resident Individual in
FWP
Any Financial Institution conducting investment
-Resident To an Individual in conducting
NFWP
-Non Resident business
Any other person
-Corporation NFWP
-Non Resident Individuals
Any other person other than
Any person NFWP
Financial Institution
Foreign Financial Institution Resident Individual under Sec 6(2) NFWP
Local Financial Institution Resident Individual under Sec 6(2) FWP
III. RENT
Rent is the payment for use of asset (tangible) of another person.
Example land, building, other tangible assets, the assets must be investment Asset
This is the withholding payment for which one making payment (resident person) shall withhold
tax at the rate of 10%
The amount of rent received shall be included in the income of a recipient considering the
following:
Sec 86(1) (c) rent received by and individual other than rent received in conducting business shall
be FWP.
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Source of Rent To Impact
From any Person Resident Individual in Conducing FWP

investment
Resident individual in conducting NFWP

investment
Any other person NFWP
• Company
• Non-resident person
Sec 86(4) rent received by resident individual in respect of residential premises stuated in URT
that is rent to another resident individual other than:
• Rent received in conducting business

• Where the amount of rent does not exceed Tshs 500,000 during the YOI
The tax payer shall not have withholding obligation under sec 4(4)(c) the tax payer shall not
withhold tax.
IV. LOYALTY
Loyalty is the payment for the use of an intangible asset of another person.
This is the withholding payment for which the one making payment shall withhold tax at the rate
of 15%.
The amount shall be included in the income of a recipient i.e. it is a non final withholding payment.
Summary Table
Royalty source To From
Any person Any person NFWP – 15%
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V. NATURAL RESOURCE PAYMENT sec 83
Natural Resource Payment is the payment for right to extract natural resources in an area.
This is the withholding payment for which a payer shall withhold tax at the rate of 15% before
making payment.
The amount shall be included in the income of recipient i.e. it is NFWP
Source To Impact
Any person To Any person NFWP
TAX CREDIT - Sec 87
For any payment referred to under sec 81, 83 & 83
• S. 81 PAYE
• Sec 83 Dividend, Rent, Interest and Loyalty
• Sec 83 Service fee, natural resource payment
Which turned to be a non-final withholding payment (NFWP) shall be granted a tax credit
equivalent to the amount withheld at the source.
It is assumed that the amount withheld has been paid by the recipient.
Tax Liability (total income X tax rate)…………xxxx
Tax credit on NFWP (Amount withheld)……...(xxx)
Net Tax Payable………………………………xxxx
Sec 84, the amount of tax withheld under sec 81, 82 and 83 shall be paid to TRA within 7 days
after the end of the month in which the amount is withheld.
Sec 85, the person will be given the tax withheld certificate, which shall be used to claim for tax
credit under sec 87.
Note that: No tax credit shall be given under sec 87 without having a withholding certificate.
Sec 84(4) withholding agent shall file a return showing the amount of tax withheld every after en
of six months which is due 30 days after the end of six months.
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Coverage Due Date
January to June 30th July
July to December 30th January next year
VI. DISTRIBUTION BY THE TRUST

Distribution by the trust is any amount distributed by a resident or non-resident trust to its
beneficiaries (trustee).
The amount shall be included in the income of the recipient considering the following:
Sec 52(2) Distribution by:
a) Resident trust shall be exempted in the hand of the recipient.
b) A nonresident trust shall be included in the income of a recipient.
Note that: this payment is not a withholding payment.
Source To Impact
Resident Trust Any person Exempted
Non-resident person Any person Taxable Income (included)
SEC 60 GAIN OF AN INSURED FORM LIFE INSURANCE
Sec 60(3) is the extent to which the amount derived by the amount from insurance company,
exceed the amount paid by a person to insurance company as a premium i.e. receipt >Premium.
Sec 60(2) (a) If the gain is from resident insurance company it shall be exempted in the hands of
recipient.
(b) If the gain is from a resident insurance company, the amount shall be included in income of
the recipient.
Source To Impact
Resident Company Any person Exempted
Non-resident Company Any person Taxable Income (included)
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SEC 63 GAIN FROM UNAPPROVED RETIREMENT FUND
Sec 63 (2) means the extent to which the amount derived from fund by a person exceeds the amount
contributed to the fund by the person.
Sec 63 (1) (a) if a gain from a resident unapproved retirement fund shall be exempted in the hand
of recipient
(b) If the gain is from unapproved pension fund shall be included in the income of the recipient.
Source To Impact
Resident Unapproved Retirement Any person Exempted

Fund
Non-resident Retirement Fund Any person Taxable Income (included)
A. GAIN ON REALIZATION OF INVESTMENT ASSETS.
Gain / Loss = Selling Price – Cost
Selling Price Sec 38 – is the total consideration from sale of an asset
Cost sec 37 – Is the cost of an Asset including purchase price, installation cost, transport cost,
dismantling or demolition cost, tax paid on purchase of an Assets, other miscellaneous cost
associated with an asset like legal fee etc.
Sec 36(3) the loss form realization of investment asset shall be carried reward indefinitely i.e. will
be offset when he sell other investment asset at a gain.
Note that: There shall not be offset on the Investment income, business Income or Foreign source
income.
B. Amount derived as a consideration on acceptance of restriction to conduct investment
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C. OTHER AMOUNT TO BE INCLUDED
Sec 24: Recovery of Bad Debts
Sec 26: Long term contract income: Included based on the stage of completion.
Sec 32: Gain from insurance company on general insurance investment assets amount recovery
shall be included in the income of recipient.
Gain/ Loss = Recovery Amount – Cost of the Asset
Sec 43: Transfer of Asset for free by an individual to a spouse or old spouse shall be assumed
to have been transfer at the price equivalent to the carrying amount of an asset.
Selling Price = Carrying Amount
No gain no loss on disposal this NIL amount shall be included.
Sec 39 when an asset is said to be realized:
• When an asset is: sold, transfer, lost or completely destroyed

• When liability become bad:
For loan granted by financial institution, bad debt is said to be bad following BOT
regulation.
Sec 44: Transfer of an asset to an individual to any other person other than spouse or old
spouse of an individual shall be assumed to be transferred the asset at the price equivalent to the
market value of the asset.
It is assumed that the person receiving an asset has been incurred cost equivalent to the market
value of an asset and the person giving an asset has received the consideration equivalent to the
market value of the asset.
Thus
Gain/ Loss = Market Value – Carrying Amount
Sec 55. Transfer of an asset for free by company to its shareholders, directors or any other
stakeholder (related person) shall be assumed to have transferred an asset at the price equivalent
to the market value of that asset.
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Then Gain shall be determined
Gain/ Loss = Market Value – Carrying Amount
Sec 56 Realization of an asset of the company through change of ownership
Sec 56(1) A company whose ownership have changed by more than 50% of ownership that was
there in the previous 3 years shall be assumed to have realized all its assets and liabilities.
Therefore Gain/ Loss on realization shall be established.
Sec 56(1) the company realized assets under above shall not do the following:
a) Cannot carry forward unrelieved interest under sec 12(3) to amount in excess of 7/3 of D/E
Ratio
b) Cannot write back any amount referred to 26(4) ie loss resulted due to completion stage
apportionment
c) Cannot carry forward unrelieved loss under sec 19(1)
d) Cannot carry forward loss from realization of an asset under sec 36(3)
e) Cannot carry forward unrelieved tax credit as the result of tax paid abroad.
All the above shall be allowed by the company if:
a) The company continue with the same business or investment which was being carried in
the previous 12 months before such change in ownership (i.e. before such realization of an
asset and liability)
b) The same business continue on the same 2years from the date of change of ownership (such
as realization of an asset and liabilities)
SEC 9(3) AMOUNT TO BE EXCLUDED
a) Exempt amount and final withholding payment

b) Amount included in business and employment income
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DAR ES SALAAM CPA REVIEW CENTER B4&C4-Public Finance Taxation & Advanced Taxation CPA (T) DAVID D KIWIA

ii) Investment Asset

But does not include -

(a) Business assets, Depreciable assets and trading stock;

• House must be private resident of individual (owner should be an individual)

AMOUNT TO BE INCLUDED SEC 9(2)

Dividend is the return or reward for owning shares.

Sec 54(10 Dividend distributed by:

a) A resident corporation shall be taxed in the hand of recipient as a final withholding

Sec 86(1) Dividend distributed by

Dividend Source To Impact

• From Resident Corporation to Resident Corporation

Interest is the payment for use of money of another person.

The lender receive interest as income.

This is withholding payment Sec 82(1)

i) Interest is received in conducting business

Dividend Source To Impact

Foreign Financial Institution Resident Individual under Sec 6(2) NFWP

Local Financial Institution Resident Individual under Sec 6(2) FWP

Rent is the payment for use of asset (tangible) of another person.

Source of Rent To Impact

From any Person Resident Individual in Conducing FWP

Resident individual in conducting NFWP

Any other person NFWP

• Rent received in conducting business

Royalty source To From

Any person Any person NFWP – 15%

V. NATURAL RESOURCE PAYMENT sec 83

The amount shall be included in the income of recipient i.e. it is NFWP

Any person To Any person NFWP

TAX CREDIT - Sec 87

For any payment referred to under sec 81, 83 & 83

Tax Liability (total income X tax rate)…………xxxx

Tax credit on NFWP (Amount withheld)……...(xxx)

Net Tax Payable………………………………xxxx

Coverage Due Date

January to June 30th July

July to December 30th January next year

VI. DISTRIBUTION BY THE TRUST

Resident Trust Any person Exempted

Non-resident person Any person Taxable Income (included)

SEC 60 GAIN OF AN INSURED FORM LIFE INSURANCE

Resident Company Any person Exempted

Non-resident Company Any person Taxable Income (included)

SEC 63 GAIN FROM UNAPPROVED RETIREMENT FUND

Resident Unapproved Retirement Any person Exempted

Non-resident Retirement Fund Any person Taxable Income (included)

A. GAIN ON REALIZATION OF INVESTMENT ASSETS.

Gain / Loss = Selling Price – Cost

Selling Price Sec 38 – is the total consideration from sale of an asset

B. Amount derived as a consideration on acceptance of restriction to conduct investment

C. OTHER AMOUNT TO BE INCLUDED

Sec 24: Recovery of Bad Debts

Gain/ Loss = Recovery Amount – Cost of the Asset

Selling Price = Carrying Amount

No gain no loss on disposal this NIL amount shall be included.

Sec 39 when an asset is said to be realized:

• When an asset is: sold, transfer, lost or completely destroyed

Gain/ Loss = Market Value – Carrying Amount

Then Gain shall be determined

Gain/ Loss = Market Value – Carrying Amount

Sec 56 Realization of an asset of the company through change of ownership

Therefore Gain/ Loss on realization shall be established.

All the above shall be allowed by the company if: