UNIT 3

SPECIFIC GROSS INCOME

3.0 Introduction

The definition of gross income includes all amounts which are specifically covered under
paragraphs (a) to (s) of Section 8(1). This unit will deal with the specific paragraphs.

3.2 Paragraph (a) – Annuities

This paragraph brings into gross income any amount received or accrued by way of an
annuity, but it excludes, in the case of a purchased annuity, that amount which represents
a return of the purchase price of the annuity. The nature of an annuity was considered in
the Income Tax Case 826(1956) 21 SATC 189 as follows “An annuity may be described
as an annual payment in perpetuity for life of the grantee or for a limited period…..”.
The characteristics of an annuity are as follows:-

 it provides for an annual payment, even if divided into installments

 it is repetitive, payable from year to year, at any rate, for some period, and
 it is chargeable or claimable against some person

3.2.1 An annuity can arise in various forms:-

 a purchased annuity for example an annuity purchased from an insurance company

 an annuity granted by gift or legacy
 an annuity granted as consideration for the sale of a business or an asset or surrender
of a right or
 an annuity or pension for services rendered
 an annuity constituting an “annuity on retirement”(purchased out of a lump sum
payment from a pension fund.)

The source of a contractual annuity is considered to be the place where the contract was
concluded, refer to Boyd v CIR (1951) 17 SATC 366 case law. However, if the annuity
is from a pension or benefit fund, generally the source is considered to be the country in
which the fund is located. A foreign annuity purchased by a person resident in
Zimbabwe at the time of purchase is considered to be from a source within Zimbabwe.

3.2.2 Taxation of annuities

a) Purchased annuity

Purchased annuities are normally bought from an insurance company. The annuitant
(person who purchased the annuity) is taxable only on the interest content of the annuity
 that is excluding purchase price (if any). The formula for calculating the taxable interest
content is given below:-

I = (P x N) - A
N
Where:
I = interest content
P = gross annuity received per year
A = purchase price of annuity (excluding any deductions granted when making
contributions)
N = the number of annual payments expected

Note: any amount received after the expiry of N years is taxable in full as the full cost
will have been allowed over N years.

Example
Purchase price $80 000
No. of years 10
Annual payment $40 000

I = (40 000 x 10) – 80 000

10

= $32 000

However, an annuity on retirement as defined in Schedule 1 to the Income Tax Act is

taxed in full.

b) An annuity by gift, donation or legacy

The annuity is taxed in full as there is no cost to the taxpayer. It must be noted
that the annuity is taxed in full even if it is made up partly of exempt income. The
true source has to be from Zimbabwe.

c) Annuity arising from the disposal of an asset

The formula given above is used for calculating the taxable portion of the annuity.
The cash value of the asset at the date of sale is the purchase price (A) of the
annuity.

Example
Mr. A sold a house to Mrs B for $100 000. Since Mrs B did not have cash on hand, she
offered to pay over a period of 4 years. Mr. A accepts the offer but wants her to pay $27
000 per annum for the 4 years. Please calculate the taxable portion of the annuity if any.
 Solution
Using the above formula the interest content would be

I =(27000x4) – 100 000

4
=$2 000 per annum

d) Annuity or pension for service rendered

The pension is taxable in full if the contributions to the pension were allowed as
deductions from income. If no deductions were allowed or if only part contributions
were allowed, then that disallowed amount would represent the purchase price and the
formula above will be utilized for calculating the interest content of the annuity (I)

Example
A retiring employee whose life expectancy is 16 years is entitled to a pension of $64 000
a year from the employer’s fund. It has been established that the employee’s contribution
exceeded the deductible limit in his hands by an aggregate of $48 000. You are required
to calculate his annual taxable annuity.

Solution
Pension 64 000
Less 48 000
16 3 000
61 000

e) Annuity constituting an “annuity on retirement”

This is taxable in full.

3.3 Paragraph (b) – Amount for service rendered

All amounts received or accrued for services rendered, or to be rendered whether

voluntarily or under any contract of service are brought into gross income by this
paragraph. Such amounts include salary, wages, overtime, cash in lieu of leave and gifts
for any work done (for example tips for waiters).

Proviso (ii)

Provides that leave pay is deemed to accrue proportionately on the last day of each month
of leave.

3.4 Paragraph (c) Lump sum payments from pension or benefit fund see Unit 12.
 Lump sum payments arise where a person has resigned from employment or has
withdrawn from a pension or benefit fund or where the fund has been wound up. In all
these cases the taxpayer must have contributed to such a fund.

3.5 Paragraph (d) – Lease premiums

Section 8(1) (d) of the Income Tax Act brings into gross income a premium or like
consideration. The definition of premium or like consideration was given in the case of
CIR vs Butcher Bros (Pty) Limited 13 SATC 21 as follows:-

“Premium or like consideration means an amount having an ascertainable money value,

passing from lessee to lessor, whether in cash or otherwise, distinct from and in addition
to or in lieu of rent”.

It must be noted that a “premium” is paid for the right of use of:-

 land and or buildings

 plant and machinery
 patents, trade marks
 films and recordings or
 use of “knowledge”

Example
A lease land to B for a payment of $10 000 and a monthly rent of $1 000 per month. The
$10 000 is a premium because it is paid by the lessee to lessor and it is over and above
rent paid, and it is for the right to use land, some people have defined a premium as “key
money”.

Note: (i) that the premium is taxable in the year of receipt or accrual
(ii) that a premium can only be between lessee and lessor, or sub lessee and
sub lessor

3.6 Paragraph (e) - Lease improvements

This section deals with lease improvements which will have been effected by the lessee
on land or property belonging to the lessor which he will hand back to the lessor on the
expiry of the lease period. Thus the lessor will have been enriched.

For the section to apply there must be a legally enforceable obligation whereby the lessee
is bound to effect improvements. In certain circumstances the obligation can be implied
(for example In Rex Tea Room Cinema (Pvt) Ltd vs CIR 14 SATC 76). In this case the
lessee had to use the premises only as a tea room cinema café yet when he entered into
the lease agreement the premises were not suitable for such use. It was held that there
was an enforceable obligation on the part of the lessee .
The value to be taken is the value stipulated in the agreement between the lessor and the
lessee. Where the cost exceeds the stipulated value, the stipulated value applies for the
purposes of calculating the taxable amount. If the lessee builds something worth more,
the balance is regarded as being voluntary improvements.

If the variation of the value is done prior to completion of the improvements and is
agreed to by the lessee and lessor then the varied figure will be taxable. In COT v
Ridgeway Hotel Ltd (1961)24 SATC 616 the courts held that an upward variation before
completion of improvements is acceptable as long as the lessee and lessor agree.

Where the variation is made after completion of the building, the original amount is
brought to tax disregarding the amount actually spent as spelt out in Professional Suites
Limited vs COT 24 SATC 573 where it was held that the deed of variation could not be
taken into account since it was executed after the completion of the building.

However, if the lessee is compelled to spend a minimum sum on the erection of specific
buildings or buildings which meet specific requirements, so that the lessor could oblige
him to erect such buildings even if the cost exceeded the minimum amount stipulated in
the lease, he will be entitled to an allowance representing the fair and reasonable cost of
such buildings. For example, X is obliged to erect a clinic to the value of:-
(a) at least $200 000 or
(b) not less than $200 000.

The allowance is based on the fair and reasonable cost of the clinic.

Where no such specific buildings or specific requirements are mentioned in the lease,
which simply provides that buildings of no less than a stated sum must be erected, the
lessee is obliged to build to the stated value and no more.

The date of completion of the improvements is the date of accrual.

The amount accrues in equal monthly installments over the unexpired period of the lease
or 10 years, whichever is less. If the period of the lease is for more than 10 years (for
example a stated period of 15 years), and construction takes one year to complete, the
denominator is 10 years (120 months) because the unexpired period of the lease is 14
years.

If the period of the lease is indefinite and construction takes say 8 months to complete,
the denominator is 10 years that is 120 months.

If the lease is for an initial period and can be renewed, then that initial period is the one
taken into consideration for calculations purposes.

The untaxed balance, if any, accrues immediately if the lessor:

 cancels the lease or in the case of cession or assignment; or

 sells the land or buildings on which the improvements were effected; or
 dies, becomes insolvent or is put under liquidation

Example
A lease is granted provided the lessee erects a hotel to the value of not less than $600
000. The period of lease is 30 years from 1 January. The building takes 2½ years to
complete. The actual cost is $620 000. How much is included in gross income and when
are the amounts so included?

Solution
The unexpired period of the lease is 30 years less the 2½ years of construction which is
27½ years. This is restricted to 10 years which is 20 months. The calculation will be as
follows:-

Year 1 and 2. Nothing is included as the building is not yet complete.

3rd year (July – December) $620 000 x 6 months

120
= $31 000

4th year to 12th year (12 months each) $620 000 x 12 months
120
= $62 000

13th year (6 months) $620 000 x 6 months

120
= $31 000

Example
John Basopo entered into a 5-year lease agreement on 1 st January of year 1 with Mr.
Maruwa the owner of the property. John was using the property for business purposes.
One of the lease conditions was that John effects some improvements on the property.
The agreed limit on the value of improvements being $800 000. John completed the
improvements in September of year 1 of the lease to the value of $780 000 and brought it
into use on 1st October year 1. Mr. Maruwa accepted the improvements as complying
with the lease agreement.

Calculate the income to be taxed in Mr. Maruwa’s hands and the deductions to which
Basopo is entitled by 31 December of the 2nd year.

Solution

Year 1
Mr. Maruwa
Total lease period = 5 years x 12 months 60 months
Less 9 months to September 9 months
Unexpired lease period 51 months
 Taxable amount = 780 000 x 3 months
51 $45 882

Mr. J. Basopo
The same amount of $45 882 is deductible in his hands.

Year 2
Mr Maruwa taxable amount = 780 000 x 12 months = $183 529
51
Mr. J. Basopo
The same amount of $183 529 is deductible in his hands.

Activity 3.3

Landowner Pvt Ltd let property to Tenant Pvt Ltd for a period of 10 years starting on 1
January Year 1. In terms of the Lease Agreement, Tenant Pvt Ltd is obliged to erect a
building at a
value of not less than $750 000 to the approval of Harare City Council. After 6 months,
the
building is completed and is occupied by Tenant Pvt Ltd for the purpose of its trade. It is
clear
that the Harare City Council would have approved the building costing $600 000. After
completion of the building at an actual cost of $790 000 Landowner Pvt Ltd agreed to a
variation of the building clause in the Lease Agreement to amend the initial figure from
$750 000 to $790 000.You are required to compute the income taxable to the lessor and
the deductions allowable to the lessee. Use case law to support your computation for the
whole period the Lease Agreement exists.

3.7 Paragraph (f) – Free benefits in terms of services rendered

Employers may remunerate their employees for services rendered or to be rendered in

cash or in any other way, but any advantage or benefit which can be connected with an
employee’s employment forms part of his gross income. Advantage or benefit is defined
in the act as “board; the occupation of quarters or of a residence; the use of furniture or of
a motor vehicle; the use or enjoyment of any other property including a loan; or an
allowance” It is important that there should be an employer-employee relationship.
There shall be no taxable benefit to the extent that the amount is used for the employer’s
business, or to the extent that the employee pays the employer for its use.

With effect from 1st January 2013, the waiver of the whole or any portion of the amount
of tuition fees, levies and boarding fees(school benefit) that would otherwise be payable
by the employee who is a teaching or non-teaching staff of a school, for any child of his
or hers who is a student at that or another school is now gross income. There is a portion
which is exempt in the 3rd Schedule. See Unit 4.

3.7.1 Valuation of free benefits:

 a) in the case of occupation or use of quarters, residence or furniture it is calculated
by
reference to the value to the employee;

b) The valuation in any other case is by reference to the cost to the employer or
deemed cost in the case of motor vehicles and loans.

3.7.2 Housing

The value to the employee for quarters or residence is generally the fair market rental of
the house if it is within a municipal area. If outside a municipal area, the value to
employee should not exceed 12½% of salary or 7% of the cost of the property as a
yardstick. The value is reduced by whatever the employee pays.

For example if Mr. X resides in a company house for free situated in Highlands whose
market rentals are $1000 per month. The annual value to be included as gross income will
be $1000x12=$12 000.
If X is asked to pay monthly rentals of $200 then the taxable value will be ($1000-200)
x12= $9
600.

3.7.3 Furniture

The value to the employee for use of furniture should generally be 8% of the cost of the
furniture as a yardstick.

3.7.4 Motor vehicle

A motoring benefit is an advantage obtained by an employee from the private use of an

employer’s vehicle. Private usage includes travelling between home and place of work.
Deemed amounts of benefit in the year of assessment are stipulated in the Act and revised
from time to time. The deemed benefits per annum is according to engine size/capacity
Deemed benefits per annum for 20014 are as follows:-

Up to 1500cc $3600 ($300 per month)

1501 cc to 2000cc $4800 ($400 per month)
2001cc – 3000cc $7200 ($600 per month)
over 3000cc $9600 ($800 per month)

3.7.5 Passage Benefits

A passage benefit is generally a payment for a journey undertaken by an employee or his

family which is borne by an employer. An exception to this is a passage benefit granted
to an employee on taking up of employment which is not taxable if no such benefit has
been granted to the employee by the same employer.
Similarly, on termination of service, any repatriation expenses are not taxable in the
hands of that employee if no other similar passage benefit has been granted by the same
employer. The cost of a holiday borne by an employer on behalf of the employee is
taxable in the hands of the employee.

If a journey is for dual purposes that is business and private, the benefit shall be
apportioned accordingly. A passage benefit paid by an employer on behalf of the
employee’ spouse or child shall be taxed in full in the hands of the employee.

3.7.6 Allowance

Allowance is gross income in the hands of the employees and therefore taxable in full
except that portion of allowance used on employer’s business. A good example of such
is entertainment allowance. The employee is required to prove the amount expended on
business for example an employer gives his employee an entertainment allowance of $1
000. $800 was used in entertaining the employer’s customers. The taxable benefit is
$1000 - $800 = $200.

Please note that certain allowances are specifically exempt from tax for example
Housing and transport allowances paid to civil servants.

3.7.7 Loan

If an employer, directly or indirectly, grants an interest free or low interest loan above
$100 to an employee, employee’s spouse or near relative, such loans result in a deemed
benefit arising at the rate of LIBOR +5%. The benefit is calculated using the simple
interest formula that is outstanding loan x rate x period.

The loan can also be made available to the employee by a person associated with his
employer or on behalf of the employer. Person associated is defined in the Income Tax
Act and is very wide.

If the employee is charged with interest below the above rates, then the benefit is
calculated as the difference between the actual rate and the statutory rate. If the rate
charged is higher than the one stipulated by the Act, no benefit arises.

There is, however, no interest benefit on loans granted towards the education or technical
training or medical treatment of the employee, spouse or child.

Example 1
Mr. B. borrowed $10 000 from her employer on 1 st April 2012 at no interest. Assuming
that the LIBOR rate is 7%, calculate Mr. B’s taxable income from this transaction.
Solution
Taxable benefit = (7 + 5)% x 10 000 x 9 months
12 months

= 12% x 10 000 x 9 months

12 months

= $900

Example 2
Using the facts above calculate the taxable benefit if Mr. B. was asked to pay an interest
rate of 4% by his employer.

Solution
Taxable benefit = (12% - 4%) x 10 000 x 9 months
12 months

= $600

If Mr. B had been asked to pay an interest rate of 14% no taxable benefit arises.

Example 3
Viola is a managing director of a local company that exports most of its products. She is
a single mother with a primary school going age child. Viola is highly self motivated and
as a result has worked so hard for the company such that the company profits have been
on the upward trend for the past five years. In appreciation of Viola’s efforts and in an
attempt to retain this human asset, the company increased her annual salary to $50 000
and decided also to give the following incentives to Viola as from 1 January 2012.

Company car 3000cc

Company house in Gunhill (market rentals) $6 000 per month
Company furniture (cost) $80 000
School fees for child $46 000 (for 2012)
Entertainment allowance $10 000
Allowance expended on employer’s business $8 200
From the information given, calculate Viola’s taxable income.

Solution
Viola’s taxable income for the tax year 2012

Salary from employment $50 000

Benefits from employment:
- company car – 3000cc 600 x 12 months) $ 7 200
- school fees for child $46 000
- unexpended entertainment allowance (10 000 – 8 200) $ 1 800
 - company house (6 000 x 12 months) $72 000
- company furniture (80 000 x 8%) $ 6 400
Taxable income $183 400.

3.8 Paragraph (g) – Timber

If timber or crops for sale are disposed of, whether or not for any valuable consideration,
with the land, the market value of such timber or crops at the time of sale or disposal of
the land is included in gross income. However, where the land is acquired by inheritance
or donation and the timber or crops did not become part of the business assets of the
beneficiary, then no amount is included in gross income if the land is sold together with
the timber or crops.

3.9 Paragraph (h) – Closing stock

Trading stock is defined in section 2 and includes goods and other property acquired or
partially made for the purpose of disposal in the ordinary course of trade. Section 8 (1)
(h) describes circumstances under which a taxpayer’s trading stock is included as gross
income as listed below:

 closing stock at the end of the tax year – at cost price or replacement value or market
value
 stock taken for domestic or private consumption – at cost price or market value
 stock which has been vested in the trustee of a person on insolvency, winding up or
death or donated
 or sold or exchanged – at cost price, replacement value or market value
 Attached by court order – cost price, replacement value or market value
 sold with business or sold in pursuance of an order of court – selling price
 partially manufactured stock – at fair and reasonable value.
The cost price includes freight, insurance, duty, and other expenses incurred in bringing
the trading stock to hand.

The Commissioner does not accept the LIFO method.

3.10 Paragraph (i) – Recoupment from capital expenditure (Mining)

This topic will be dealt with in Unit 10

3.11 Paragraph j – Recoupments

Amounts previously allowed as deductions are brought into gross income when recouped
or recovered. The recoupment is restricted to allowances previously granted on the asset.
Amounts that are not recoupable are:-

 investment allowances
 amounts contributed to a pension fund by an employee
 special farmers deductions contained in paragraph 2 of 7th schedule
 This paragraph includes in gross income also any (highly uncommon) recoveries by an
employer on the closing down of a pension or benefit fund.

3.12 Paragraph k – Concessions by Creditors

Where a taxpayer, having incurred a liability in respect of expenditure which has ranked
as a deduction in terms of section 15(2), is subsequently released by the creditor, (ie. he is
asked to pay less than the liability) the value of the benefit arising as a result is included
in gross income.

The benefit cannot exceed the section 15(2) deduction. This paragraph does not apply to
insolvents and assignors, vested farmers and companies wound up by the court for being
unable to pay their debts.

3.13 Paragraph l – Recoupments; Rentals, Premiums, Lease improvements and so on,

Payable, Applied against Purchase Price

The paragraph provides that where a lessee of property, on acquisition of the property, is
allowed to set off against the purchase price any premium, rents paid or improvements
made under the lease, such amounts are included in gross income of the person who
acquires the property if the amounts had been allowed as a deduction in terms of section
15 (2).

Any amount included in the gross income under this paragraph may, if the taxpayer so
elects be deemed to accrue in 6 successive equal installments ie.over 6 tax years. If the
taxpayer disposes of the property before expiry of the 6 years then the balance of the
untaxed installments will be included in his income in the year in which the property is so
disposed.

Example 5
A leases a machine from B. He paid a total of $100 000 in rentals over the past 2 years
while using the machine. B decides to sell the machine for $180 000. A offers to buy the
machine and B allows him to offset the $100 000 rentals paid against the purchase price
and pays only $80 000. Amount applied in reduction of purchase price (deemed
recoupment) = $180 000 - $100 000 = $80 000

3.14 Section 8 (1) (m) – Grants and Subsidies

Amount accrued by way of grant or subsidy in respect of any expenditure allowed as a

deduction. An example would be any subsidy paid by Government after say, the
construction of a farm dam. The subsidy is subject to tax in the year in which it accrues,
even though the project in respect of which it arises may have been completed during a
previous year.
3.15 Section 8 (1) (n) – Commutation of a Pension from a Retirement Annuity Fund

Where contributions were made on or after 1st August 1970 this type of a pension
commutation is taxable only to the extent to which it exceeds the amount which would
have been payable had one third (1/3) only of the total value of the pension been
commuted.

3.16 Paragraph (o) – Designated Area Grants

Any amount accruing in terms of the State Scheme is included in gross income.

3.17 Paragraph (p) – Petroleum Operations and Special Mining Leases

These provisions are of limited interest for this course

3.18 Section 8 (1) (r) – Commutation of a Pension Fund from a Pension Fund or the
Consolidated Revenue Fund

This subsection brings into gross income any amount accruing by way of a commutation,
other than that from a retirement annuity fund, if the pension itself would have been
subject to income tax.

3.19 Section 8 (1) (t) – Benefit Arising from Employee Share Option Scheme
The amount so received or accrued as a result of the sale of shares offered to an employee
pursuant to a share option scheme, as adjusted in accordance with the following formula:

A – B where:-

A represents the value of the shares at the time of exercise of the share option by the
employee
B represents the value of the shares offered to the employee pursuant to a share
option scheme

3.20 Section 8 (2) Exchange Rate Variations

In the case of foreign transactions the gross income is the amount accrued expressed in
Zimbabwean currency, which is currently the US dollar. If due to a fluctuation in the
rates of exchange the amount received differs from the accrued, the amount received,
expressed in Zimbabwean currency, constitutes the recipient’s gross income. If the
receipt and the accrual occur in different years of assessment effect must be given to the
increase or decrease in the year in which the amount is received.

Example
XYZ plc based in Zimbabwe, manufactures blankets exported to countries like Botswana,
Namibia and South Africa. At the beginning of the year, a consignment of such goods
was dispatched to Botswana and it was valued at P460 000. The exchange rate ruling at
the time the transaction was done was P1 = Z$5. The amount was payable in six months
time. However, the payment for this consignment was received the following year when
the exchange rate had risen to P1 = Z$7. How much income should be included in the 1 st
year and what necessary adjustments should be done in the following year.

Outline at least three circumstances when income is deemed to be from a source in

Zimbabwe.

Solution
Year 1 Included in gross income is the amount of $2 300 000 (P460 000 x 5)
Year 2 included in gross income is the amount of $920 000
Amount actually received is P460 000 x 7 = 3 220 000
Less: amount previously recorded as accrued = 2 300 000
Exchange rate gain = 920 000

- Section 12(1)(c): income in respect of service rendered whilst outside Zimbabwe for a
period less than 183 days
- Section 12(1)(d): income in respect of service rendered to the State, both within and
outside Zimbabwe
- Section 12(2): income derived from dividends on securities from a source outside
Zimbabwe