Capital Gains Tax Act

Chap 23:01
CAPITAL GAINS TAX
 CAPITAL GAINS TAX [CGT ACT 23:01]

 Capital Gains tax is tax charged to non-traders on sale of

specified assets.
 A specified asset is an immovable property or marketable
security situated in Zimbabwe irrespective of the owner’s
country of residence.
 Marketable security refers to a share or stock, debenture or
bond traded on the stock exchange

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•An immovable property include houses, commercial
buildings, industrial buildings, dams, land, roads,
mineral rights.
•movable property such as equipment, cars, plant,
machinery, etc. are not chargeable assets.

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 RATES OF CAPITAL GAINS TAX
Capital Gains Withholding Tax Final Capital Gains Tax

Unlisted shares 5% 20%

Listed shares on the ZSE 1% -

Sale of immovable Property 15% 20%

Sale of Principal Private Residence (PPR) 15% 20%

Sale of immovable property acquired before 22 5% -

February 2019
Sale of immovable property acquired after 22 15% 20%
February 2019
Sale of PPR by an elderly person (55 years) 0% 0%
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 Immovable property purchased in Zimbabwean dollars prior to 1
February 2009 is subject to a deemed Capital Gains Tax of 5% on
the capital amount realized from the sale
 Marketable securities purchased in Zimbabwean dollars prior to 1
February 2009 are subject to a final Capital Gains withholding tax
of 1%
 But effective 1 Aug 2019: Capital Gains Tax for immovable
property acquired before 22 February 2019 to be computed at
5% on the gross selling price or assessed value.
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COMPUTATION OF CGT

Gross Capital Amount xxx

Less : Amt taxed under the Income tax act xxx
Exemptions xxx
Capital amount xxx
Less Allowable deductions
Cost of specified asset xxx
Cost of improvements xxx
Inflation allowance xxx

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Selling expenses xxx (xxx)
Capital Gain/loss xxx
Tax thereon @ 20% = xxx
Less Withholding tax paid (xxx)
Total Tax payable/Refundable xxx

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GROSS CAPITAL AMOUNT

 Any amount from the disposal of a specified asset excluding

any amount taxed under ITA e.g recoupment
 Disposal means sale, transfer of ownership, exchange, forfeiture
or surrender of a specified asset.

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EXAMPLES OF DEEMED DISPOSALS

i. Donation of an asset- market price to the donor

ii. Expropriation – compensation received
iii. Sale in execution of court order-selling price
iv. Deed of sale- amount fixed in the deed of sale agreement
# NB: Deed of Sale means a deed of sale, in form and substance
satisfactory to the parties, acting reasonably, evidencing the
conveyance to the purchaser of the vendors’ (seller) right, title
and interest in and to the owned real property.

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 EXEMPTIONS

 Disposal of an asset in a deceased person’s estate

 Effective 01 January 2019, sale of shares or other marketable securities to the Sovereign
Wealth Fund shall be exempt from CGT.
 Up to $14 400 on sale of marketable security by a person who is 55yrs and above
 Disposal of a Principal Private Residence (PPR) by a person who is 55yrs old or above
 Disposal of units in a unit trust by a fund manager
 Disposal of a specified asset by a registered licenced investor or industrial park developer
 Disposal of a specified asset by an entity not operating for gain such as a church, educational
institution of a public character, professional association, medical aid fund, local authority,
pension or benefit fund, trade union, etc
 Donation of houses to community development trusts
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 DEDUCTIBLE EXPENSES (ALLOWABLE
DEDUCTIONS)
 Cost of acquisition of asset
 Expenses incurred in improving value of the asset
 Expenses incurred in disposing the asset e.g legal and advertising
costs, selling expenses such as commission
 Inflation adjustment on cost of acquiring the asset and cost of
improving the asset
• If a company owning immovable property disposes shares, the cost of
any alterations or improvements to the property is treated as
improvements to the shares.

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ACQUISITION OTHER THAN BY WAY OF
PURCHASING
 Inherited specified asset-value of asset assigned for
estate duty purpose
 Donation received before 1 August 1981 –fair market
value of asset.
 Donation received after 1 August 1981-value used in the
computation of the donor’s CGT or income tax.

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 INFLATION ALLOWANCE

• Is granted on costs of acquiring or improving a specified asset at 2.5%

of cost incurred in each year or part of a year during the asset’s holding
Inflation = 2.5% x gross cost x holding period
NB: No inflation allowance is granted for disposal of immovable
property purchased in Zimbabwean dollars prior to 1 Feb 2009 but
instead capital gains tax of 5% is charged on the amount realized
(Gross proceeds).
Same principle applies to property acquired before 22 Feb 2019.

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 INFLATION ALLOWANCE: EXAMPLE

Mr Johns aged 54 sold his house for $70 000 in March 2019. The
house had been purchased for $40 000 in April 2010.
Mr Johns had extended the house at a cost of $10 000 in March
2016.
The cost incurred in arranging the sale of the house was $2 000.
Calculate the capital gains tax to be paid by Mr Johns.

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SOLUTION

Gross capital amount - 70 000

Less Deductible expenses :
Selling expenses 2 000
Cost of acquisition 40 000
Cost of improvement 10 000
Inflation: Acquisition(40000x2.5%x10) 10 000
Inflation: Improvement(10000x2,5%x4) 1 000
63 000
Capital Gains 7 000

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SOLUTION (CONTD)

Capital Gains Tax (20% x 7 000) - 1 400

Less Withholding tax (15%x70 000) - 10 500
Capital gains tax refundable ( 9 100)

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 CAPITAL GAINS TAX RELIEF

a) Capital losses
• Any capital losses can be set off against any capital gains
arising in the same tax year or carried forward to the
following years indefinitely as long as it exceeds $100, and
$800 after 1 Aug 2019.
• Losses are personal and cannot be transferred to another
person
• Losses cannot be set off against other income other than
Capital Gains Income.
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EXCEPTIONS

• Losses cannot be carried forward or deducted in the following circumstances:

i. Insolvent taxpayers
ii. Conversion of a company into a private business corporation
iii. Acquisition of a company with an assessed loss

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DAMAGE OF A SPECIFIED ASSET

 When a specified asset is destroyed or damaged it is deemed sold for a value of

the compensation received.
 If compensation is insufficient to cover acquisition and improvement costs of the
asset capital gains tax will be deferred.
 The compensation will be offset against the cost to arrive at a new base cost.

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EXAMPLE

A building with a base cost of $140 000 was destroyed by fire and
compensated for $120 000.

Calculate the capital gains tax to be paid.

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SOLUTION

No capital Gains tax to be paid because compensation is insufficient to

cover acquisition and improvement costs of the asset.
Base cost 140 000
Less compensation 120 000
Reduced Base cost 20 000

When the asset is finally sold the cost of the asset will be the reduced
base cost of $20 000 and inflation allowance will be calculated on the
basis of the new cost.

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COMPENSATION USED TO
REPAIR,CONSTRUCT OR ACQUIRE SIMILAR
ASSET
• Tax is deferred if compensation is made within two years of
damage.
• CGT shall be charged on gain applicable to the utilised
compensation.

e.g. A house which had been acquired for $70 000 in 2016 was
gutted by fire. The ITV of the house was $65 000. A compensation
of $200 000 was received in 2019 from an insurance company and
$90 000 was used to replace the house. Calculate the capital gains
tax on this transaction

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SOLUTION

Gross capital amount 200 000

Recoupment 5 000
195 000
Less deduction
Original Cost 70 000
Capital allowance (5 000)
65 000
Inflation all(70 000x4yrx2.5%) 7 000 72 000

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Potential capital gain 123 000
Less Rollover[(90 000/200 000)*123 000] 55 350
Capital Gain 67 650

***When the asset is finally disposed the amount used in replacing or

repairing the asset is not deducted when calculating capital gains tax of the
reconstructed asset****

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PRINCIPAL PRIVATE RESIDENCE

•A PPR is a person’s sole residence situated in Zimbabwe

including a garage, storeroom, swimming pool, land
surrounding the residence not exceeding 2 hectares.
•Only one residence is considered as PPR in the case of a
person owning more than one residence.
•An undeveloped residential stand is treated as PPR if
held for the purpose of developing it into a PPR.

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FEATURES OF A PPR

A person’s sole or main residence during the

period it was owned by him
A person’s sole or main residence for at least 4yrs
before the date it is sold
A person’s sole or main residence despite him
being prevented from residing due to
employment
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PPR-ROLLOVER RELIEF

•CGT can be deferred on the sale a PPR if the proceeds

from its sale are used to purchase or construct another
PPR
•In order to qualify for rollover relief:
i. An election for rollover must be made on or before
the date of submitting a return for assessment of
capital gains
ii. The asset must be replaced on or before the end of
the year following that of sale.
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 EXAMPLE
Mr Jones sold his house for $85 000.The cost incurred in
selling the house was $2 000 commission and $700 legal fees.
The house was purchased 10 years ago for $20 000. Mr Jones
had painted the house for $3 000 and made a lot of repairs
valued at $10 000 prior to selling it. He purchased a new
house for $90 000 a week after selling the old house. One
month later he extended the house at a cost of $30 000 and
constructed a swimming pool at a cost of 25 000 as well as a
tennis court at a cost of $35 000.
Calculate the CGT on sale of Mr Jones’ house
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 SOLUTION

Gross capital amount 85 000

Less cost (20 000)
Inflation allowance (20 000x10x2.5%) (5 000)
Commission (2 000)
Legal fees (700) (27 700)
Potential gain 57 300
Deferred gain 57 300
Taxable capital gain -
Painting and repairs do not improve the value of the house and therefore are not included
in the costs.

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PARTIAL ROLLOVER RELIEF

• Occurs when only part of sale proceeds of an asset is used to purchase another
asset
• CGT is calculated in respect of unutilised amount as follows:

Partial rollover relief = AXB

C
A = Amount used to purchase or construct a new PPR
B =Potential capital gain on old PPR
C= Proceeds accruing from sale of old PPR

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 EXAMPLE

Question
Mr Peters sold his home for $90 000 and used $70 000 to replace it on 1 Jan 2019. The
potential capital gain was $5 000.Calculate the rollover relief.
Ans- Rollover relief = $70 000 x $5 000
$90 000
=$3 889
*** The rollover relief is set off against the cost of the new PPR and the inflation
allowance of the new PPR is calculated based on this reduced value ***

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EXAMPLE

Question
Mr Peters sold his home for $90 000 and used $70 000 to
replace it on 1 Jan 2019. The potential capital gain is $5
000. The new home is sold for $78 000 and another one
purchased in the same area for $65 000 on 31 Dec 2019.

Calculate Capital gains tax.

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SOLUTION

Gross capital amount $78 000

Cost 70 000
Less Rollover relief 3 889
66 111
Inflation all (66 111X 1x2.5%) 1 653 67 764
Capital Gain 10 236

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Capital Gains Tax (10236 x 20%) - 2 047
Less Withholding tax (15% x78 000) 11 700
Capital gains tax payable (9 653)

NB The last house sold for $78 000 was not a PPR because it was held for less than 4 years

***Rollover relief is deducted every time when a PPR is sold and another one purchased for a
value less than the selling price.***

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 If a home used both as a place of residence and for business is sold and another
one acquired, rollover relief is determined proportionately to the extent to which
it is used as a place of residence.
 Example:
 Mr Jones purchased an apartment for US$120 000 in 2012 for use as a
home. Half of the apartment was converted into a pre-school in 2016 and
the whole apartment was eventually sold for $2 000 000 in 2019. He
purchased another apartment for $1 500 000 in 2019. Calculate capital
gains tax to be paid

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SOLUTION

Capital gain =$2 000 000x 5% = $100 000

Roll over = 1500 000 x 100 000 x 50%
2000 000
= $ 37 500

Potential Capital gain 100 000

Roll over relief (37 500)
Capital gains tax payable 62 500

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TRANSFER OF ASSETS BETWEEN GROUP
MEMBERS
• CGT is deferred if an election is made, when a specified asset is sold to a related
party if:
i. there is no payment for the exchange
ii. An election is made not later than date of submitting a return for assessment
of CGT
iii. this is done in the course of reconstruction or merger.

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HUSBAND AND WIFE

 Disposal of specified asset by one spouse to another does not result in CGT
 If this asset is sold to a third party, the first spouse’s base cost is used in calculating the
second spouse’s CGT.
 If a jointly owned specified asset is disposed, then the capital gain is apportioned
proportionately among the spouses
Example:
Loveness sold her house to her husband Isaac for $90 000. The house had been acquired for
$40 000 ten years ago. Isaac sold the house to his brother John for $95 000 two years from
the time of owning it.
Calculate Capital Gains tax to be paid by:
(a) Loveness
(b) Isaac

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SOLUTION

a) Loveness
Gross capital amount 90 000
Less Cost of house 40 000
Inflation allowance(40 000x2.5%x10yrs) 10 000 (50 000)
Potential Capital Gain 40 000
Deferred capital Gain 40 000
Recognised gain -

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b) Isaac
Gross capital amount $95 000
Less Cost of house 40 000
Inflation all (40000x2.5%x12yrs) 12 000 52 000
Recognized capital Gain 43 000
Capital Gains Tax = 43 000 X 20% 8 600
NB: Because of the proximity of the seller of the property to the buyer they may apply
for exemption from withholding tax.

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REINVESTMENT RELIEF

 It is similar to rollover relief.

 Occurs when an immovable property used in business is disposed and a similar
one purchased or constructed on land belonging to the tax payer.
 If part of the proceeds from disposal is used to acquire another property, then
reinvestment relief is claimed to the extent to which a new property is acquired.

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TRANSFER OF IMMOVABLE PROPERTY

 Rollover relief is allowed when a sole trader business transfers an immovable

asset to a company business owned/controlled by the same individual

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SHARES

1. Bonus issue
2. Rights issue
3. Share splits
4. Share consolidations
5. Share reduction
6. Share buy back
7. Employee share options
8. Share swaps

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BONUS ISSUE

 These are shares acquired without making any payment.

 However, when such shares are disposed there is a cost determined on the basis
of original shares purchased.
 This cost for bonus shares will be lower than the cost of shares originally
purchased because of dilution.
Example:
An investor acquired 600 000 shares at a cost of 10c per share in January 2010. In
January 2013 there was a bonus issue of 1 new issue for every 4 held. Five years later
he sold 350 000 shares at 30c per share.
Calculate the capital gain tax

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SOLUTION

(i)New cost per share

Purchased shares 600 000
Bonus issue (600 000/4 ) 150 000
Total number of shares 750 000

Cost of shares (600000x 10c) $60 000

Cost per share ($60 000/750 000) = 8c per share

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(ii) Capital Gain Tax
Gross capital amount (350 000x $0.30) $105 000
Less Cost of shares(350 000x$0.08) 28 000
Inflation all($28000x2.5%x8) 5 600 33 600
Capital Gain 71 400

Capital Gains Tax (71 400 x 0.20 )= 14 280

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 RIGHTS ISSUE

 Are additional shares purchased at a price lower than the market price of the shares
 Their cost is enhancement cost
 Inflation allowance of these shares is determined from the time when original shares were
acquired.
Example
An investor Purchased 100 000 shares in a ZSE listed company in April 2009 for $20 000. In 2013
he acquired additional shares in a rights issue of 1:4 at a cost of $8 000. In March 2019 he sold
50 000 shares for $15 000.
Calculate capital Gains tax to be paid

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SOLUTION

Gross capital amount 15 000

Less Original cost[(50 000/125 00)x$20 000] 8 000
Right issue cost[(50000/125 000)x8000] 3 200
Inflation allowance (11 200x11x2.5%) 3 080 (14 280)
Capital Gain 720
Capital gains tax (720*20%) 144

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SHARE SPLIT/SHARE CONSOLIDATION

The cost of old shares is spread among the new number of shares.

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 EMPLOYEE SHARE OPTIONS

 Capital gains arise at the moment the shares are disposed by the employee.
 The cost for the shares will be the market price at the time the employee exercised his/her
right to acquire the shares and not the actual amount paid.
 The capital gains tax is calculated at 5% on the gross capital amount if the option was
granted prior to 1 Feb 2009
Example:
An employee was granted an option to buy 5 000 company shares at $1 per share on 1 Jan
2016 as part of his remuneration. The employee exercised his option on 1 Feb 2018 when the
market price of the shares was $1.50. On 1 Mar 2019 the employee sold 2 000 shares at $2
each.
Calculate the capital gains tax.
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SOLUTION

Gross capital amount(2 000x2) 4 000

Less Cost (2000x1.5) 3 000
Inflation all ($3000x2.5%x 2) 150 (3 150)
Capital gain 850

Capital gain $850x 20% = $170

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PARTNERSHIP

 If an asset belonging to a partnership is disposed, capital gains tax is calculated in

proportion to the interests of the partners.
 A change in the interest result in capital gain and partners increasing interest
must reflect the increase in the base cost of their interest in asset.

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WITHHOLDING TAX

• Is computed on gross proceeds of the specified asset

• Is not a final tax except on disposal of shares listed on the ZSE
• Is a mechanism for deducting tax at source in order to minimise the risk of tax
avoidance or evasion.

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WITHHOLDING AGENT

 Is the person responsible for withholding the tax

 The withholding agent is a depository, seller or an agent
 A depository is a legal practitioner, conveyancer, state agent, stock broker,
financial institution, sheriff or Master of high court
 The withholding agent must withhold and remit the tax to Zimra by the 3rd
working day of receiving proceeds from the sale of a specified asset.
 If the withholding agent fails to withhold the tax, the payee(owner of property)
must pay the tax by the third day of receiving the sale proceeds.

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 A withholding agent who fails to withhold or remit the tax is liable to pay
the tax due,100% penalty on tax due and interest at 10% p.a on tax due.
 The penalty and interest on tax due may be waived or reduced if the
Commissioner is convinced that the reason for not paying tax was not to
evade payment of tax.
• Where a payee pays the total tax due but the agent does not withhold tax,
the agent will only pay the penalty and the interest.
• There is no tax withheld where the payee has a tax clearance certificate.

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• Withholding tax is calculated on the gross capital amount of
specified asset as follows:
i. 15% on immovable property
ii. 1% on marketable securities listed on ZSE
iii. 5% on unlisted marketable securities.
iv. 5% on Sale of immovable property acquired before 22 February 2019 (effective Aug
2019)
***The withholding tax is credited against capital gain tax when final
assessment is done***

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TAX CLEARANCE CERTIFICATE

 A tax clearance is issued by ZIMRA once the withholding tax is paid.

 Is required by the deeds office to register or effect transfer of the property.
 Is an offence to register specified asset without a tax clearance.

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DOCUMENT NEED TO APPLY FOR TAX
CLEARANCE CERTIFCATE
 Completed capital gains tax 1 form
 Agreement of sale for the property
 Deed of transfer or tittle
 Proof of payment for additions, alterations or improvements incurred on the
property
 A letter of undertaking to pay withholding for client represented by a depository.
 A proof of payment of capital gains tax or withholding tax

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 SALE OF BUSINESS

The following taxes comes into the picture:

i. Capital gains tax on specified assets
ii. Income tax on recoupment
iii. Value added tax
iv. Withholding tax on dividends paid to members
v. Stamp duty

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TWO WAYS OF DISPOSING A BUSINESS

• The sale of business can be by way of shares or business assets.

a) Sale of shares- The business is sold as a going concern and
the buyer acquires ownership or interest in the company.
• This arrangement is more favourable to the seller because
double taxation is avoided (Income tax on recoupment and
capital gains on specified assets)

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• The seller only pays capital gains tax on the specified assets.
• There is no income tax paid on recoupment
• The advantages to buyers of purchasing shares are :
i. A lower stamp duty of 0.5% is paid on shares compared to 7.5% paid on
purchasing immovable property.
ii. Buyers can carry forward losses of the seller
This arrangement has disadvantages to buyers in that they inherit all
liabilities including tax liabilities.

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• b) Sale of business assets- In this arrangement the buyer is purchasing assets rather than
a company.
• This arrangement is not suitable to the seller in that the seller will pay higher tax in the
form of capital gains tax on specified assets, income tax on recoupment of disposed and
VAT on assets used to produce taxable supplies and on which input tax had been refunded.
• Purchase of assets rather than shares is more preferable to buyers because:
i. They do not inherit tax and other liabilities of the seller
ii. Can claim capital allowances on the acquired assets

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• The disadvantages of asset arrangement to buyers is :
i. They can not carry forward losses of the target company
ii. Can not deduct bad debts arising from debts taken over
NB : In both cases, the buyer pays stamp duty.

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DISPOSAL OF SPECIFIED ASSETS UNDER
SUSPENSIVE SALE AGREEMENT

•Capital gain relating to amounts not due at

year end allowed as a deduction, but to be
added back the following year, when a fresh
calculation is then made, if applicable.

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Suspensive allowance = A*(B-C)
D
 Where: A = Portion of proceeds not yet due
 B = represents the capital amount deemed to have accrued
under the agreement;
 C = represents the aggregate of the sums deductible in respect
of such specified asset in terms of section eleven;
 D = Total proceeds on sale
any allowance so deducted shall be included
by the taxpayer as a capital amount in his
return for the following year of assessment
and shall form part of the capital amount of
the taxpayer
EXAMPLE

Numeri sold his property on 30 July 2018 for $120 000, the property was built at a
cost of 80 000 in May 2015. The property was sold with the following conditions:
a) 50% deposit was to be paid on the date of sale.
b) 25% of the selling price to be paid on 30 July 2019
c) The final 25% of the selling price to be paid on 30 July 2020
d) The transfer of the property to the buyer will only occur upon full payment of the
purchase price.
Calculate the capital gains tax for Numeri for the years 2018, 2019 and 2020.
 SOLUTION

 Gross capital amount 120,000

 Less allowable deductions
Cost (80,000)
Inflation allowance (2.5%*80 000*4yrs) (10 000)
Capital Gain 30 000
Suspensive sale allowance (60/120 *(CG)) (15 000)
Taxable capital gain 15 000

Under a suspensive sale, the tax payer can apply for an exemption from withholding tax since
the taxpayer has not received the full proceeds.
OTHER ADMINISTRATIVE ISSUES

 The capital gains tax annual return (CGT 1) should be submitted to ZIMRA by 30
April of the following year.
 A fine of $30 a day up to 181 days is payable for late submission of the return.
 Capital gains tax is payable to ZIMRA within 30 days of sale agreement in the case
of suspensive sales.
 In other cases it must be paid to ZIMRA within 30 days of transfer of ownership.