UNIT 2

GROSS INCOME

2.0 Introduction

Zimbabwe taxes its income basing on the source of funds. Whether the taxpayer lives in
or outside Zimbabwe has little bearing to taxation of income in Zimbabwe. Section 6 of
Income Tax Act (ITA) (Chapter 23:06) requires that income tax be charged, levied and
collected from all individuals and enterprises that derive taxable income in accordance
with the Income Tax Act.

2.1 Unit Objectives

After studying this unit, you should be able to:
 define gross income
 determine the source of income
 describe deemed receipt and deemed source
 explain the difference between capital and revenue receipts

2.2 Definition of Gross Income

The starting point for the determination of the taxable income of a taxpayer is the
definition of gross income in section 8(1) of the Income Tax Act.

The definition states initially that the term means:-

 the total amount
 received by
 or accrued to or in favour of
 a person
 or deemed to have been received by or to have accrued to or in favour of a person
 in any year of assessment
 from a source within or deemed to be within Zimbabwe

It then eliminates most receipts and accruals proved by the taxpayer to be of a capital
nature, but identifies those which are to fall within the definition regardless of whether
they are of a capital nature or not.

Each of the above elements is discussed below.

2.2.1 The total amount

Section 2 of the Act defines “amount” as money or any other property, corporeal or
incorporeal, (that is tangible or intangible) as long as it has an ascertainable money value
for example, fringe benefits.

2.2.2 Received by …

Means received by the taxpayer on his own behalf for his own benefit in any year of
assessment. A person will have received an amount even if it is paid to his agent or if it
is banked on his behalf. A person does not ‘receive’ money which for example he has
stolen: COT v G (1981) 43 SATC 159. Nor does he ‘receive’ money which has been lent
to him: CIR v Genn and Co. (Pty) Ltd (1955) 20 SATC 113 for example, where an estate
agent receives rent on behalf of a landlord, the rent will be gross income in the hands of
the landlord not the Estate Agent.

2.2.3 Accrued to …

An amount is said to have accrued if it is ‘due and payable’ to the taxpayer or if he is

‘entitled to it’ in any year of assessment. In Lategan v CIR’s case the appellant was a
wine farmer who sold wine on credit with a deposit being paid on delivery. It was held
that the words “has accrued to or in favour of any person” merely meant “to which he had
become entitled to”. The taxpayer had acquired the right to claim payment of the debt in
the future.

2.2.4 Received or accrued …

In practice the Commissioner taxes on accrual basis. Where accrual and receipt occur in
different tax years the Commissioner will tax on accrual and when receipt occurs the
amount is not taxed for the second time. Maguire v COT (1996) 28 SATC 146 and GV
COT (1972) 34 SATC 62 Commissioner does not have unrestricted power to choose the
year of assessment.

2.2.5 A person

“Person” is defined in section 2 as including:-

 a company
 a body of persons, corporate or unincorporated (not being a partnership)
 a local or like authority
 a deceased or insolvent estate, and
 in relation to income the subject of a trust to which no beneficiary is entitled, the trust
 an individual
There is no residential qualification in this definition meaning that a non-resident can be a
person for tax purposes..

Activity 2.1
Mr. Chando runs a furniture shop in town where he sells furniture on credit. His total
sales for the current tax year amounted to $120 000 and he only received cash of $70 000
whilst the balance was to be paid in the following tax year. He wants to know the tax
implication of this.

2.2.6 Or deemed to have been received by or to have accrued to or in favour of a

person

Section 10 sets out the special circumstances in which income is deemed to accrue.

i) Income not paid over S(10)1

Income shall be deemed to have accrued to a person notwithstanding that such income:-
 has been invested, accumulated or otherwise capitalized by him or
 has not been actually paid over to him but remains due and payable to him or
 has been credited to an account or re-invested or accumulated or capitalized or
otherwise dealt with in his name or on his behalf

ii) Partnership income S(10)2

Unlike the case of an individual operating as a sole trader, whose profits accrue day by
day, each partner’s share of the joint profit of a partnership accrues only on the
‘accounting date ‘.

iii) Donations to minor children. S(10)3

If a parent makes a donation to his minor child, the income which accrues as a result of
the donation is deemed to be income of the parent who made the donation. Minor child is
defined as a child who is under 18 years and is unmarried. It is the income flowing from
the donation that is taxable and not the donation itself.

Example:-
Mrs. X donates $100 000 to her minor child and the money is loaned to a company which
pays the child an interest of $10 000. This interest is deemed to accrue to the mother and
is taxable in the mother’s hands.

iv) Minor child’s income flowing from donations made reciprocally. S(10)4

This section, among other things, counter tax avoidance schemes by means of which
taxpayers try to circumvent the provisions of Section (10) 3 above. A reciprocal donation
can also be made where:

Parent A donates to Bc (B’s minor child)

Parent B donates to Ac (A’s minor child)

Parent A Parent B

Minor child Ac Minor child Bc

Parent A is taxable on the income which accrues to Ac as a result of the donation by B.

Parent B is taxable on the income which accrues to Bc as a result of the donation by A.

v) Income postponed by stipulation of maker of donation, settlement or other

disposition. S(10)5

This deals with a situation whereby a person makes a donation (commonly to a trust) for
the purpose of divesting himself of the right to the income from the donated assets but at
the same time withholding such income from the beneficiaries until the happening of
some event. In such a case the beneficiary is taxed on the distributed income and the
donor is taxed on the undistributed income.
 vi) Income accruing under rights / powers retained by maker of donation,
settlement or other disposition. S(10)6

This subsection deals with income from any deed of donation, settlement or other
disposition in which there is conferred upon the donor the right to revoke or to confer the
income upon another beneficiary. In such circumstances the income is deemed to be the
income of the donor so long as he retains those powers.

Activity 2.2
1. Mr. X is employed by 2Y Pvt Ltd on a monthly salary of $6 000. His salary is paid
through the bank. He has a standing stop order of $1 200 to CABS to pay
for his mortgage. He argues that he should not be taxed on the $1 200 instead he
should only be taxed on the balance which he receives. Discuss.
2. Section 10 of the Income Tax Act Chapter 23:06 lists various instances in which
income is deemed to have accrued to a taxpayer. Explain any five such instances.

2.2.7 In any year of assessment…

Section 2 of the Income Tax Act defines year of assessment to mean a period of 12
months beginning on the 1st January in any year in respect of which tax is to be charged,
levied and collected in terms of the Act and includes any period within such a year of
assessment.

2.2.8 From a source within Zimbabwe…

The word ‘source’ is extensively used in tax matters, yet it is one of the undefined words.
Guidance to the meaning of the word is again sought from the large number of cases in
which the meaning has been considered. The test laid down by Watermeyer, CJ, in CIR
vs Lever Bros and Unilever Ltd (1946) 14 SATC 1 seems authoritative when it states
that:-
“… the source of receipts, received as income, is not the quarter whence they come, but
the originating cause of their being received as income and that this originating cause is
the work which the taxpayer does to earn them, the quid pro quo which he gives in return
for which he receives them”.

In order to determine the source of a receipt or accrual one needs to answer the following
two questions:-
 what is the originating cause of the income?
 where did the originating cause take place? If it is Zimbabwe then the true source is
Zimbabwe.

2.3 Various Types of Income are Considered Below:

2.3.1 Dividends

The source is the shares and the shares are situated where they are registered. Where the
dividends are from shares registered in a branch register in a country other than that in
which the company is incorporated, the source is the country of incorporation in which
the principal register is situated, as the branch register is deemed to be part of the
principal register. Cases supporting this are Boyd vs CIR 1978 SATC 366 and Lamb vs
CIR 20 SATC 1.

In Boyd’s case the taxpayer received dividends from a company incorporated in South
Africa which derived most of its income from mining outside South Africa. It was held
that as the dividend was derived from shares which were located in South Africa where
the principal register was it was from a source in South Africa. Lamb’s case involved
shares held in a branch register and the courts ruled that a branch register is deemed to be
part of the principal register.

2.3.2 Income from business operations

Generally, profits from business operations, such as trading, manufacturing, mining or

farming, have their source where such operations are conducted. However, where such
operations extend outside Zimbabwe, the decision on sources depends on the facts of
each case.

2.3.3 Rent of movables

In general, rent accruing from use of movables (for example, machines used in the
manufacturing of footwear or the packaging of milk), generally has its source at the place
where the asset is used by the lessee but where smaller items (for example, cars hired for
limited periods) are concerned, the source is where the taxpayer’s business is situated
(COT vs British United Shoe Machinery (SA) PTY 2 SATC 163).

2.3.4 Sale and rent of immovable property

Source of profits from the sale of immovable property is the country in which the
immovable property is situated (Rhodesia Metals Limited vs COT 11 SATC 344) and
rent from such property follows the same principle. This case concerned the source of the
profit made on the sale by the company of its principal asset, which consisted of mining
claims situated in Zimbabwe. The company was registered and resident in England. The
courts held that the source of profit was Zimbabwe.

2.3.5 Income for services rendered

The originating cause is the services rendered and the source is located where the services
are rendered regardless of place where the contract is concluded or payment made from
and to. In the case of COT vs Shein 22 SATC 122 the source of earnings was the work
done in return for earnings. It therefore follows that an individual from another country
who comes to work in Zimbabwe as an employee will be taxed on his earnings
notwithstanding that such remuneration, or part of it, is receivable outside this country.

In cases where an individual is employed to work specifically in businesses both inside

and outside Zimbabwe his earnings would have to be apportioned, probably on a time
basis. Terms of the contract of service becomes crucial in such cases. In ITC
1104(1967)29 SATC 46 a commercial diver working in the Zambezi river at Kariba took
his equipment from his Harare base to the Zambian bank of the river and set up a small
temporary office there. Diving operations were done on both sides of the river. Only
profits from operations on the Zimbabwe side were held to be taxable in Zimbabwe.

A different result from the above arose in ITC 1127(1969) 31 SATC 114 where a Harare
based film producing company carried out contracts for making films which involved
shooting certain portions outside Zimbabwe. The film was then produced in Zimbabwe
and the courts found the source to be Zimbabwe since the originating cause was the
performance of a contract to do certain filming.

2.3.6 Directors fees

The originating cause is the service rendered by the director of attending meetings and
the source is at the Head Office of the company.

2.3.7 Royalties

The originating cause is an author’s wits, labour and intellect and it is located where
these are exercised. The source is not where the book is published or sold. Millin v
CIR (1928) 3 SATC 170 Mrs. Millin wrote a book in South Africa but the right to
publish was granted to an English publisher under a contract concluded in England.
The courts held that the source was where she had exercised her wits and labour in
writing the book not where it was published and sold.

2.3.8 Interest

The originating cause is the supply of credit. The source is located where the credit was
supplied (CIR vs Lever Brothers and Unilever Ltd 14 SATC 1).

Example 3
The definition of “gross income” brings into the tax net amounts from a source within
Zimbabwe. A general test of source was laid down by Watermeyer, CJ, in CIR v Lever
Bros and Unilever Limited (1946), 14 SATC 1, as follows:-

“… the source of receipts, received as income, is not the quarter whence they come, but
the originating cause of their being received as income and that this originating cause is
the work which the taxpayer does to earn them, the quid pro quo which he gives in return
for which he receives them.”

You are required to state in one sentence the rules for determining the source of each of
the following specific types of income
 annuities
 author’s royalties
 directors fees
 dividends
 interest
 rental from immovable property
 rental from movable property such as car hire
 remuneration of employees
 fees for professional services
 share sales
 Solution
 the country in which the contract is concluded
 the country where the author exercises her / his wits and labour in writing the book
not where it is published and sold – Millin’s case
 where the board meetings were held, that is where the Head Office of the company is
situated
 place where the principal share register is held
 where the credit is supplied
 where the property is situated
 country in which the owner of the hired asset carries on his hiring business
 where the services are rendered
 generally the place where the services are rendered
 generally the country in which the investment dealing decisions are made.

2.4 Deemed source – Section 12

This section brings to account certain types of income whose true source is outside
Zimbabwe by deeming it to be from a Zimbabwe source. It also ensures that liability
arises on amounts the true source of which is doubtful.

2.4.1 Business Operations: Sale of goods - S 12(1)a

Provides that amounts received or accrued under any contract made in this country for the
sale of goods, regardless of the country of origin or delivery, are deemed to be from a
source within Zimbabwe.

2.4.2 Income from services rendered – S 12(1)b

Receipts for any services rendered in the carrying on in Zimbabwe of any trade
irrespective of where or by whom payment is made, are deemed to be from a source in
Zimbabwe.In ITC 1102 and ITC 1104 concerning hiring and diving operations
respectively in the Zambezi river, the fees for diving on the Zambian side which were the
dispute were found neither to be from a true source, nor deemed to be from a source in
Zimbabwe.

In ITC 1105 (1967) 2 SATC 116 a taxpayer carrying on business as an insurance assessor
in Zimbabwe, carried out loss investigations in Zambia and Malawi, embodying his
findings in reports prepared in his Harare office. His fees from the investigations were
found to have been earned in the carrying on of his trade in Zimbabwe.

2.4.3 Temporary absence - S 12(1)c

Provides that an amount received or accrued for services rendered as an employee outside
Zimbabwe by a person ordinarily resident in Zimbabwe, during a period of temporary
absence, is deemed to be from a Zimbabwean source, irrespective of where the payment
is made.
“Temporary absence” means an absence for a period or periods not exceeding in the
aggregate 183 days during the year of assessment. “Employee” includes a director of a
company.

2.4.5 Services rendered to the Zimbabwe Government - S 12(1)d

An amount received or accrued for services rendered to the state is deemed to be from a
source in Zimbabwe except in the case of a person who,“ is not ordinarily resident
outside Zimbabwe solely for rendering such service”.

Example
A secretary recruited in South Africa to work for the Zimbabwean High Commission will
not be taxed in Zimbabwe because he / she is not ordinarily resident in South Africa
solely for the purpose of rendering the service. The Zimbabwean High Commissioner
would be taxed in Zimbabwe because he is ordinarily resident in South Africa solely for
the purpose of rendering the service.

Activity 2.3
Mr. J. Chando is a managing director of a local firm based in Gweru. He has presented
you with the following information so that you help him determine his taxable income
Annual salary $1 200 000
Performance bonus $40 000

2.4.6 Pensions and annuities for services rendered - S 12(1)e

Provides that pensions granted by:-

 any person wherever resident
 the Government of the former Federation or the State
 for the services rendered will be deemed to have a Zimbabwean source unless the
services for which the pension was granted were performed wholly outside
Zimbabwe, and the pension was granted other than by the state and relates to service
inside and outside Zimbabwe. In this case, the portion deemed to be from a
Zimbabwean source must be calculated in the proportion to the period of service in
Zimbabwe. The following formula is used:-

Period of local service x pension

Total service

2.4.7 Foreign interest and dividends – S 12(2)

Foreign interest and foreign company dividends shall be deemed to be from a source
within Zimbabwe if at the time the income accrues the person is ordinarily resident in
Zimbabwe.

2.4.8 Foreign annuities – S 12(3)

Deems income received by way of annuity from a foreign source (for example purchased
from an insurance company) to be from a source within Zimbabwe if the annuitant was
ordinarily resident in Zimbabwe at the time the annuity was acquired.
 2.4.9 Royalties – S 12(4)

Deems royalties from the use in Zimbabwe of a patent, design, trademark, copyright,
plan, secret process or formula, motion picture film or television film in Zimbabwe or the
imparting of knowledge, to be from a source within Zimbabwe.

2.4.10 Recoupment – S 12(5)

Any amount which is included in gross income by virtue of paragraphs (i) or (j) of the
definition of “gross income” (that is recoupments) is deemed by this subsection to be
from a source within Zimbabwe notwithstanding that such amount may have been
recovered or recouped in another country.

Activity 2.4
1. Mrs. Kay received a pension of $15 000 for services rendered to Old Mutual for
30 years. She spent 25 years working in Zimbabwe and was transferred to
Zambia for the last 5 years. Calculate her gross income in relation to the pension.
2. From the above facts, if Mrs. Kay was working for the Zimbabwean Government
would this alter your answer? If so calculate the gross income.

2.5 Capital Receipt

The definition of Gross Income excludes receipts that are proved by the taxpayer to be of
a capital nature. Examples of capital receipts are insurance policy proceeds on maturity,
goodwill, lottery wins, an inheritance and the sale of a private asset.

The term “receipts of a capital nature” is not defined in the Act. The distinction between
capital and revenue receipts is the question of the taxpayer’s intention when entering into
the transaction. Fortuitous receipts and accruals such as those by way of gift, inheritance
or price will generally be of a capital nature. The same goes for receipt of hobbies since
the profit-making intention would have been absent.

One can have mixed intentions in which case the dominant intention will determine if the
receipts are of a capital nature or not. There can also be change of intention from the
original intention.

Damages and compensation: the question whether compensation received is capital or

revenue depends on what is being compensated, if the amount was in respect of a “loss of
a capital asset” then it is capital or if it was to “fill a hole in the income potential” then it
will be revenue.

Receipts in respect of restraint of trade are generally of a capital nature.

Insurance proceeds: just like compensation fall into two categories namely:-
recoupment of losses or expenses incurred such as through damage to a fixed asset or loss
of stock by fire and lumpsum payments on the happening of an event whether or not a
financial loss has been incurred for example the death of an insured person.
 Most receipts in the first category, if they are connected with trade, fall within the
“recoupment” provisions of Section 8(1)(i) and (j) of the ITA. A policy covering loss of
profits is taxable.

A point to note is that a transaction that is entered into only once does not automatically
mean that the profit is not taxable. Also illegal business may result in gross income. The
sale of goodwill constitutes a capital receipt.

Activity 2.5
Mrs. K. who is ordinarily resident in Zimbabwe received the following amounts during
the tax year ended 31 December 2012:-

$
Salary from Old Mutual Zimbabwe 150 000
Dividends from OK Zimbabwe 20 000
Rent from house in Zimbabwe 12 000
Rent from Zambian house 16 000
Inheritance from a late aunt 500 000
Lotto win 80 000
Interest from USA 5 000
Salary earned whilst working for a Malawian company in Malawi 20 000
for 4 months
Annuity from Fidelity Life Insurance (This had been purchased for 6 000
$50 000 and is to be paid for a period of 10 years effective 1/1/12)
Royalties from a book Mrs. K wrote whilst she was in South Africa 18 000
and had it published and sold in Zimbabwe
827 000

Calculate total gross income

Solution to Activity 2.5

Salary from Old Mutal Zimbabwe 150 000
Dividends from OK Zimbabwe 20 000
Rent from house in Zimbabwe 12 000
Rent from house in Zambia (source not Zim) -
Inheritance from a late aunt (capital) -
Lotto win capital -
Interest from USA 5 000
Salary from Malawi (deemed source) 20 000
Annuity from Fidelity (6 000 x 10yrs – 50 000)
10yrs 1 000
Royalties from book (source not Zim) _____ -
Total Gross income 208 000
NB: The question is asking for gross income not taxable income.