ANNUITIES

A) ANNUITIES
Annuity defined
 A fixed income stream rcd regularly over a
period or in perpetuity.
 A repetitive annual payment paid to a
particular person for some period or for life.
 CHARACTERISTICS OF ANNUITIES
a) Constant amt. Annual receipt/payment, even
if divided into instalments;
b) It is repetitive , (payable from year to year,
at any rate), for some period or for life and;
c) It is chargeable against (claimable fm)
another person.
d) It is not transferable.
 TYPES OF ANNUITIES:
 How does an annuity arise?
1. An ordinary annuity purchased from an insurance
companye.g RAF
2. An annuity by way of a gift or legacy
3. An annuity granted as consideration for the sale
of a business or an asset or surrender of a right.
4. Pension for services rendered (Pension on
retirement)
• The general principle is that an annuity is taxed in
full even if it is paid out of capital income or
exempt income; unless it represents a return of the
TP’s capital.
 1) PURCHASED ANNUITY
Where the purchase price of the annuity was not
allowed as a deduction fm the TP’s income at
the time of purchase, only the interest content of
the annuity is taxable;
I = (P x N) – A

Where:
 PURCHASED ANNUITY CONT’D
I = interest (profit) content of annuity;
P = the annual (receipt)/ payment;
N = number of payments expected (this may be
a definite period or, in the case of an annuity
payable for life, a number of years based on the
life expectancy of the annuitant);
A = the portion of the purchase price of the
annuity, that was not allowed as a deduction.
 PURCHASED ANNUITY CONT’D

b. Where a portion of the contributions towards the

purchase price of the annuity was allowed as a
deduction, the aggregate of such deductions are
excluded from A in the formula. [No TVM]
c. Any annuity rcd the expiry of the estimated life
expectancy is taxed in full, as the capital cost wd
have been recovered.
d. Where the full purchase price had been allowed
as a deduction, the annuity receivable is taxed in
full, i.e the above formula is not applicable.
 EXAMPLE
 Chiedza, a lecturer @ UZ purchased a RAF fm
First Mutual Life. Over the yrs she contributed
$15 000 to purchase it. The contributions were
not allowed as a deduction for tax purposes.
The policy matured in June 2014 and Chiedza
is entitled to $900 per month from July 2014
for 10 yrs.
 How much is assessable to Chiedza in 2014?
SOLUTION:
I = (P x N) – A
N
[(900x12)10 -15,000] x 6
10 12

= $4 650
SUMMARY- PURCHASED ANNUITIES

Purchase price disallowed Tax the interest content;

in full I=(PxN)-A
N

A portion of the purchase Exclude the aggregate

price was allowed amts allowed from A in the
formula
Annuity amts rcd beyond Tax annuity receipts in full
the life expectancy of the
TP
Purchase price was Tax annuity receipts in full
allowed in full
 II) SALE OF BUSINESS / ASSET ON CREDIT
 Arise when an asset or a business is sold for
Credit.
 Treatment is same as for a Purchased Annuity
 Only the interest component is taxable
 The taxable portion of the annuity:

I = (P x N) – A
N
The cash value of the asset at the date of sale is
the purchase price (A) of the annuity.
 III) ANNUITY FROM GIFT / LEGACY

This type of an annuity is either taxable in full

or not taxable at all depending on where the
fund is situated.
If the fund is in Zim, the annuity is taxed in full
even if it is made up of exempt (or even capital)
income. M.M . Parker v COT.
 If the fund is situated o/s Zim, the annuity is
not taxable e.g A widow’s pension, is not taxable
in Zimbabwe if it is situated outside Zim even
though her late husband may have rendered
services in this country in the past.
 IV) PENSION ON RETIREMENT
The pension amt that accrues to an individual
on attaining the minimal retirement age of 55,
until death.
Pension (annuity) is taxable in full, if the
contributions to the PF were allowed as
deductions.
The aggregate of the contributions is the cost of
the annuity. Thus in the case of a non-
contributory pension, there is no cost.
PENSION ON RETIREMENT CONT’D
Ifno deductions were allowed, or a part of the
contributions were disallowed; then the aggregate
disallowed amt will represent the purchase price (A)
in the formula;
I = (P x N) – A

N
The amount of any arrear pension fund contributions
which has not been allowed as a deduction because
of some technicality could be claimed as
representing part of the purchase price of a pension.
 PENSION ON RETIREMENT CONT’D
 The amount which was not allowed as
deduction during the time of contribution in
not taxed when it is included in the pension
being received.
 Thus the disallowed portion is deducted
equally over the life of the pension from the
annual pension being received.
 EXAMPLE
 Andile retired fm his employment on 31 Dec
2014 & is entitled to a pension of $8
000/annum fm his employer’s fund. Andile’s
contributions to the PF, have in recent yrs,
exceeded the deductible limit in his hands ito
s15(2)h arw the 6th schedule. The total
disallowed amt is $3 000. His life expectancy
is 10 yrs.
 Calculate Andile’s annual taxable income for
the yr ended 31 Dec 31 Dec 2014.
SOLN
Andile’s taxable income is the int content of the
Pension annuity; I = (P x N) – A
N
= (8 000x10)- 3,000
10
= (80 000- 3,000
10
=$7 700
ALTERNATIVE SOLN
Gross pension accrual/receipt in 2013 8 000

Less Disallowable portion= 3 000 (300)

10

Taxable income 7 700

 SUMMARY ON TAXATION OF ANNUITIES
1 Tax in full 1. Annuity fm gift or legacy
2. Pension Annuity, where contrbns
where allowed in full.
2 Tax Interest 1. Purchased Annuity: where some
Content contrbns were disallowed;
A =sum of disall. Contrbns.
2. Annuity fm sale of a buz or asset
on credit:
A =cash price of buz or asset.
LEASE PREMIUM
 LEASES
 A lease is a contract made between a lessor
and a lessee for the hire of a particular asset.
 Lessor is the owner of the property.

 Lessee is the person using the property whc he

does not own.
 Usually, the lessee should pay a deposit on
inception of the lease; thereafter he should pay
monthly rentals.
 LEASES CONTD
 The deposit is often referred to as lease
premium.
 Generally, lease rentals are business expenses
to the lessee.
LEASE PREMIUMS –S 8 (1) (D) & 15 (2) (D
A lease premium only occurs in a
lessor/lesseee r/ship.
 It is a payment (consideration) for the right of
use of the lessor’s property.
VARIOUS FORMS OF PPTY
 Property can take various forms:
a) Land & buildings (occupation of building)
b) Plant & machinery

c) Patents, trademarks, design, copyright

material & secret formula
d) Films & recording
e) Use of knowledge
(an ascertainable money value passing from a
lessee to a lessor)
 CHARACTERISTICS OF A LEASE PREMIUM
1. It is pd in addn to rent; CIR v Butcher
Brothers.
2. It is distinct in nature (easily identifiable from
rent)
3. Has an ascertainable monetary value
4. Passes from (is paid by) a lessee to a lessor or
from a sublessee to a sublessor, but never
from a lessee to a predecessor lessee; CIR v
Myerson.
TREATMENT OF LEASE PREMIUMS
In the hands of Lessor s 8 (1) (d)
• A lease premium is gross income in the hands
of the lessor.
• It is taxed in full in the year of accrual or
receipt, and is never spread.
 IN THE HANDS OF A LESSEE: S15(2) (D)
• It is deductible to the lessee over the lease
period (term) subject to a maximum of 10 yrs.
• No dedn is made of lease premiums on
property not used for business (trade).
• If property ceases to be used for trade prior to
the expiry of the lease, lessee looses
allowances for the period ff the cessation
• If lessee purchased the property, the allowance
is continued up to the end of the tax yr.
 EXAMPLE - LEASE PREMIUMS
1. Case 1. The BCC leases out land to Mr Mlilo
for $10 000 plus rental of $500/month.
2. Case 2. Mr Mlilo subletts part of the land to
BG for $6 000 plus rental of $700/month
3. Case 2. Intead of action in 2 above, Mr Mlilo
cedes his right to BG for $3 000.
Discuss the premium in each case.
 SOLUTION - LEASE PREMIUMS
1. The $10 000 is premium as it passes from
lessee Mr Mlilo to lessor (BCC).
2. The $6 000 is a premium as it passes from
sublessee BG to sublessor Mr Mlilo.
3. The $3 000 is not a lease premium as it
passes from a lesse BG to a predecessor
lessee (Mr Mlilo)_ [CIR v Myerson]
LEASE IMPROVEMENT
 LEASE IMPROVEMENTS – S 8(1) (E) & 15 (2) (E)
 Itis a common feature in the buz sector for a
lessee to put up (build) a structure on the
premises owned by someone else.
 Such a structure is referred to as a lease
improvement.
 Obviously, the structure will benefit him, and
eventually the lessor on termination of the
lease agreement.
 However, not all structures will qualify as
lease improvements:
 LEASE IMPROVEMENTS CONT’D

a) There has to be a legally enforceable

obligation i.t.o the lease agmt, binding the
lessee to effect the improvements.
b) However, the obligation can be inferred
(implied)- Rex Tea Room Cinema P/L - Since
the premises cd only be used for a café or
cinema, & were in no condition for such use
at the lease date, it was inferred tht the TP
was obliged to improve the premises.
LEASE IMPROVEMENTS CONT’D
c) The amt brought into GI is the value of
improvements stipulated in the agreement as
the amt to be incurred by the lessee for the
improvement.
d) Where the lessee builds a structure worth
more, the balance is regarded as voluntary
improvements, unless
Lessee is required to erect a specific bldg
whc meet specific requirements e.g a clinic,
cinema/film room etc.
LEASE IMPROVEMENTS CONT’D
e) Where the value is not stated in the agreement
(or the agreed amt is unreasonable), the
taxable amt is what the CG deems to be fair
& reasonable, normally the actual cost of the
improvements.
f) The value of the improvement may be
amended/varied during erection
(construction) but can not be changed once
construction is completed; Ridgeway Hotel
v COT.
 LEASE IMPROVEMENTS CONT’D

g) Where the variation is made after completion of

the bldg, no further amt is brought into GI (to
tax); Professional Suites Ltd v COT.
g) Where the initial lease period is renewed, only the
initial period of the lease is considered.
h) Also note the difference between repairs and
improvements; (restoration/maintenance v
enhancing capacity).
i) S8(1)e does not apply to voluntary improvements.

.
TREATMENT OF LEASE IMPROVEMENTS
In the hands of the lessor: s 8 (1)e
1. The value of the improvements constitutes
gross income in his hands.
2. The value of the improvements accrues to the
lessor, in equal monthly instalments over the
Unexpired period of the lease, or 10 years (120
months); whichever is the shorter (lesser.
3. The Unexpired lease period = Lease term-
Construction period i.e fm date of completion
of improvements to the end of the lease term.
IN THE HANDS OF THE LESSOR: S 8 (1)E
4. The construction period is one fm date
construction started to the date
improvements were completed.
5. The date of completion of the improvements
is the date of first accrual of the
improvements.
6. To the lessor, the date the improvements are
1st put to use is irrelevant.
IN THE HANDS OF THE LESSOR: S 8 (1)E
7. The bal, if any accrues imm if the lessor:
a. Cancels the lease (e.g where agmt is cancelled
be4 the completion of the impvts, lessor will be
taxable on the bal of the impvts as at tht date).
b. Sells the land or bldg on whc the impvts were
effected
c. Dies
d. Becomes insolvent
e. is put under liquidation
f. Cedes or assigns the lease agmt.
 CIRCUMSTANCES WHERE FUTURE INSTALMENTS ARE BROUGHT
INTO GROSS INCOME.

1. On cancellation of the lease agreement.

2. On cession or assignment of the agreement.
3. On sale or other disposal of the land or
building on which the improvements were
effected.
4. On death or insolvency of the lessor.
 INDEFINITE LEASE
• Where lease period is not given the allowance
is equal to:
Lease improvement
10YRS-CONSTRUCTION PERIOD
• Where the lease period is given allowance is
equal to:
Lease improvements
The lesser of the UNEXPIRED LEASE PERIOD
and 10YEARS
B] IN THE HANDS OF THE LESSEE: S15 (2)E

The lessee is allowed a deduction on the

value per agreement but this is spread over
the unexpired period of the lease or 10 years
whichever is the lesser.
The period of construction is disregarded,
and period where the property is not used for
purposes of trade.
IN THE HANDS OF THE LESSEE CONTD
Where the initial lease period is renewed
only the initial period of the lease is
considered.
The lessee is allowed a deduction from the
date the property is first used for purposes of
trade.
 EXAMPLE- LEASE IMPROVEMENTS
 A lease is granted provided the lessee erects a
hotel to the value of not less than $6m. The
period of the lease is 30 yrs from 1 March
2009. The bldg takes 2.5 yrs to complete at a
cost of $6.2m. How much is assessable in the
tax yr ending 31 December 2009 & the tax yrs
that follow.
 SOLN TO LEASE IMPROVEMENT EXAMPLE
 Lease stipulates a stated minimum amt of
$6m. In practice, lessee shd limit himself to
the stated amt.
 However, this is a specific bldg- a hotel
 Therefore lessee is entitled to a fair &
reasonable value of the improvements, which
is the actual cost he incurred =$6.2m.
 Lease term is 30 yrs
 Construction period is 2.5 yrs, from 1 March
2009 to 31 Aug 2011.
 SOLN CONTD
 Unexpired lease period = 30 -2.5 yrs = 27.5
yrs
 Therefore the shorter btwn Unexpired lease
period & 10 yrs is 10 yrs (120 months).
 Thus we spread the value of the lease
improvements over 120 months from 1 Sept
2011.
 SOLN TO LEASE IMPROVEMENT EXAMPLE
Tax yr Workings of the taxable amt GI
2009 & Improvements not yet completed, nil
2010 therefore not taxable.
2011 Improvements completed on 31 206 667
Aug 2011.
Therefore date of 1st accrual is 1
Sept 2011.
=6 200 000 x 4
120
2012-2020 =6 200 000 x 12 620 000 p.a for 9 yrs
120

2021 =6 200 000 x 8 413 333.

120 (8 mths to 31 Aug)

Total amt 206 667+(620 000 x9) +413 333 6 200 000
taxable
RECOUPMENT: RENT PREMIUMS APPLIED AGAINST PURCHASE PRICE S8(1)(L).

1. Where lessee eventually purchases property

on which he has previously paid rent,
premiums or made impvts; and
2. the purchase price is diminished by previous
payments , then:
3. the amount applied in the reduction is
treated as forming “gross income “ in the
hands of the purchaser (Lessee or any other
buyer).
 RECOUPMENT S8(1)L
4. Where purchase price is less than the fair
market price, the difference is deemed to
have been applied in the reduction of the
purchase price and is brought to tax as gross
income.
5. Taxpayer may elect that the recoupment be
spread over six years but should he dispose
of the property before the expiry of six years
the full balance is brought into gross
income in the year of disposal.
LEASE RECOUPMENT S8(1)L
• The discount awarded to the lessee on the
purchase price of the previously leased ppty is
deemed a Recoupment, GI in the hands of the
tenant, or any other buyer.
• Lease Recoupment is the LESSER of A or B;
where:
A=FMV of ppty less Amt pd to acquire ppty.
B=Expenditure previously incurred by the tenant
= [sum of rent pd + premium pd + impvts
incurred by tenant].
• i.e Recoupmt is restricted to the Discount.
EXAMPLE: LEASE RECOUPMENT
Chipo, who had been a tenant of an IB became the
owner of the blg in 2014, after paying 30 000 to
acquire the ppty. On the acquisition dd, its FMV was
45 000. Chipo had paid 10 000 in rentals over the
years.

Required:
Calculate Chipo’s taxable income.
 SOLN: RECOUPMENT
• Recoupment is the lesser of A & B
• A=FMV- Amt pd by purchaser

= 45 000-30 000
=15 000.
• B=sum of all previous pymts by the tenant

=10 000
• Therefore, Recoupment = 10 000
 LEASE RECOUPMENT

• Tax Planning Opportunity: Election to spread

lease recoupment over 6 yrs (1st yr being in the
tax yr ppty is purchased by tenant);
• Provided, the TP has enough taxable income,
otherwise he may loose the deductibility of an
assessed loss b/f, if he spreads the recoupment.
N.B. Lease impvts continue to be deductible up
to the end of the tax yr, during whc the tenant
buys the leased ppty.
 OTHER INVESTMENT
INCOME
PROPERTY & INVESTMENT INCOME
1. Rent rcd- A trading activity. (All dedns e.g
adverts, repairs etc)
2. Lease premium
3. Lease Impvt
4. Lease Recoupment
5. Interest Rcvable-local banks (RTI, there is no
NRTI)
6. Interest Rcvable-foreign banks
7. Interest Rcvable-non financial institutions, e.g
Debentures.
 PROPERTY & INVESTMENT INCOME CONTD
8. Dividend rcvable- local: [RST & NRST. A co
is exempted frm RST, Rate is 15% in general
but reduced to 10% if co paying div is listed
on the ZSE].
9. Dividend rcvable- foreign: special rate of 20%,
No aids levy. [DTR o/s scope]
10. Royalties- due to the deployment of
intellectual ppty.
11. Fees for services rendered in Zim, incl Non
exe drs fees. Use PAYE tables only if dr rcves
other amts constituting remuneration.
 INTEREST INCOME
1. Interest on debentures, loan stock or other
form of indebtness accruing to TPs from a
source within Zim, is taxed at 25.75%.
2. Foreign interest is also taxed at 25.75%.
3. Interest from local banks are exempt from
tax. Only a w/tax of 20% (in general) is
charged by the bank at source.
 INCOME FROM TRADE AND INVESTMENTS

 An individual may receive income from 3

sources:
1. Employment

2. Trade activities and

3. Investment activities.
 Trade income is income from business
operations. For individuals we are looking at
sole traders.
TRADE AND INVESTMENT INCOME CONTD
 Investment income is business income other
than from trade e.g interest, dividends, fees or
rentals. This is earned where the TP owns
income generating assets such as a block of
flats, shares in a company etc.
 N.B. Non-executive director’s fees also
qualify as investment income.
 The tax is due on QPDs.

 In general the tax rate on trade & investment

income is 25.75% (inclusive of 3% Aids levy).