Capital Allowances Lecture Summary (All) 2020

TAX LAW & PRACTICE(CUAC
212)
PROG: BSCAC
LEVEL: 2.2
YEAR : 2020
CAPITAL ALLOWANCES(S15(2)(c)a.r.w 4th Schedule
Introduction
Capital expenditure is a prohibited deduction.
Depreciation granted by the accountant is a prohibited
deduction as well.
However the taxman grants capital allowances as a
deduction instead, according to section 15(2) (c) of the
ITA.
Capital allowance represents the loss of value of an
asset due to use, wear and tear, etc.
CA are granted on assets that are used to generate
income that is taxable (used for trade).
CAPITAL ALLOWANCES(S15(2)(c)a.r.w 4th Sched.
Capital Expenditure-Specific Assets
The 4th Schedule provides definition of assets and the
capital allowances applicable.
Capital expenditure includes expenditure on:
Acquisition of fixed assets (including the cost of bringing
it into its useful state).
The improvements or alteration of fixed assets.
The construction of fixed assets, etc.
(i) Commercial building
Erected after 1st of April, 1975, and;
Used at least 90% for trade.
The following do not qualify:
Buildings covered by other definitions namely, farm
improvements, industrial buildings, staff housing and
tobacco barns.
(ii)Farm improvement
Any permanent building or structure or works on a farm
including;
A water furrow, cattle dip, permanent roads, dairy, a
school, hospital, nursing home or clinic which is used for
carrying on farming operations.
Exclusions
Works under paragraph 2 of the 7th schedule, or
Staff housing used by the taxpayer as homestead of
himself and his family.
(iii)Industrial building
(a) Is a building used specifically, for the following
purposes:
Used for operating machinery.
Any building which is on the same premises as buildings
used for operating machinery;
Which suffers depreciation by reason of the operation of
machinery.
purposes:
Suffers depreciation by reason of the use of chemicals,
corrosives, furnaces etc.
Used for carrying out industrial research or scientific
experiments in manufacturing.
purposes:
Used for a hotel business in respect of which a hotel
liquor licence or casino licence, has been issued,
Includes ancillary buildings, structures and works of a
permanent nature like swimming pool, golf course, etc.
Industrial building
A warehouse used for the storage of;
Raw materials which are to be used by the taxpayer for
the manufacture of other goods,
Consumables used by the taxpayer and;
Finished goods manufactured by the taxpayer.
Industrial building
Staff welfare buildings, e.g. canteens,
Excludes;
dwelling-house,
retail shop,
Showroom,
Warehouse for general storage of goods or materials
Industrial building
Includes any fencing, car parks, courtyards and
driveways in or around industrial buildings.
(iv)Passenger Motor Vehicle(PMV) –para.14
Any vehicle with a seating capacity of 15 or less
passengers,
A PMV is the luxury type of cars used for the
conveyance of passengers.
e.g. Mercedes Benz S Class, Double cabs, Prado and
Land Cruiser.
The maximum cost of each unit is limited to
…….ZWL$100,000.
(iv)Passenger Motor Vehicle(PMV) –para.14
It excludes;
Lorries, trucks, buses, minibuses, commuters and;
Motor vehicles meant for leasing and taxis.
Includes; twin/double cabs
(v)Staff Housing
Permanent buildings used by taxpayer for housing
employees.
Qualifying cost, a maximum of ZWL$250,000 cost of
construction.
If it exceeds ZWL$250,000, it is disqualified.
(vi)Tobacco barn
It is a building used for the purpose of curing tobacco.
(vii)Farm Schools, Hospitals and Clinics
At least 50% of those receiving service should be from
the farm.
The cost of each unit is restricted to a maximum of
ZWL$100,000.
(vii)Farm Schools, Hospitals and Clinics
Houses used to accommodate teachers, doctors and
nurses employed at the farm schools, hospitals and
clinics;
Are restricted to a maximum cost of ZWL$100000/ unit.
CAPITAL ALLOWANCES[S15(2)(c)] a.r.w 4th Schedule
(viii)Machinery, articles, implements or utensils
All other assets employed by a taxpayer for trade.
Examples of such assets are; computers, equipment,
etc.
Includes; computer software.
212)
PROG: BSCAC
LEVEL: 2.1
YEAR : 2021
The Taxman and Accountant compared
The taxman disregards some expenses recognised by an
accountant in respect of assets and replaces such
expenses with his own allowances.
Taxman
• The following tables give Accountant
a comparison of terms, in
respect of
Capital Allowance
assets, used by the accountant
Depreciation
and the
taxman.
Income Tax Value(ITV) Net Book Value
Recoupment Profit on Disposal
Scrapping Allowance Loss on Disposal

Capital Allowances
Special Initial Allowance(SIA),
Wear & Tear,
Scrapping allowance.
(i)Special Initial Allowance (SIA)-Para 2 of 4th Schedule
25% on cost.
First year in which an asset is used for trade.
Construction, addition, alteration or purchase of the
assets discussed above
Granted to a taxpayer upon election.
Accelerated wear and tear is charged at a rate of 25%
on cost, in subsequent 3 years.
Important notes on S.I.A:
Never apportion.
Never grant on a commercial building.
Never grant on second-hand immovable assets.
Never grant if asset is used less than 90% for trade.
Never grant on inherited of donated assets.
• Example
• Rain [Pvt] Limited has been carrying on business in Kadoma for
the past 3 years. During the year it submitted an Income Tax
return showing a profit of $33 300 before capital allowances. It
incurred the following capital expenditure during the year:
$
• Industrial building constructed 3 000
• Delivery van purchased 6 000
• Office furniture purchased 2 000
• Taxpayer elects for SIA.
• Calculate the taxable income for Rain Pvt Ltd
Rain(Pvt) Ltd
(W1) Schedule of Capital Allowances
Asset SIA@25% $
Industrial building 25%X$3 000 750
Delivery Van 25%X$6 000 1 500
Office Furniture 25%X$2 000 500
Total Capital Allowances 2750
Computation of taxable income for the year ended 31 December 2020
$
Net Profit before capital allowances 33 300
Less Capital allowances(W1) (2 750)
Taxable Income 30 550
(ii)Wear & Tear (W&T)-para.3
Main form of capital allowance granted on assets unless
the assets qualify for SIA.
Calculated on reducing balance basis on movable assets
and;
Calculated on cost of immovable assets.
Rate is generally 5% on immovable assets,
Commercial Building –rate is 2.5%.
Rate is generally 10% on movable assets;
Motor Vehicle-rate is 20%.
(ii)Wear & Tear (W&T)-para.3
Important notes on Wear & Tear:
Never apportion on immovable assets
Apportion on movable assets on usage basis.
• Example:
• Sun [Pvt] Ltd started business operations in Ruwa 2 years ago.
During the year it earned net profits of $32 500 before capital
allowances. The following assets were constructed/purchased
and used for business operations during the year:
$
• Commercial building 9 000
• Equipment 4 200
• 5 ton lorry 8 500
• Calculate the Taxable income for Sun
Sun(Pvt) Ltd
(W1) Schedule of Capital Allowances
Asset W&T $
Commercial building 2.5%X$9 000 225
Equipment 10%X$4 200 420
5 tonne lorry 20%X$8 500 1 700
Total Capital Allowances 2 345
Computation of taxable income for the year ended 31 December 2020
$
Net Profit before capital allowances 32 500
Less Capital allowances(W1) (2 345)
Taxable Income 30 155
(iii)Scrapping Allowance(para.4 )
It is the amount by which the Income Tax Value of an
asset exceeds its sales proceeds.
Equivalence of accountant’s loss on disposal.
The amount is restricted to the cost of the asset.
Granted only were asset belongs to the taxpayer and
used for trade.
Apportioned if the asset was used for dual purposes.
Example
AB Insurance Brokers (Pvt) Ltd acquired a Mazda Familiar
for its Accountant for $9 000 in 2017. The car was sold
during the current year(2020) for $1 000. The company
had elected for SIA in the year of acquisition. The
Accountant, however, used the car 90% for the business of
the employer.
Calculate the scrapping allowance on the disposal of
the car.
Solution
Year 2017: S.I.A 25% * 9 000 $2 250
Year 2018: Accelerated W& T 25% * 9000 $2 250
Year 2019: Accelerated W& T 25% * 9000 $2 250
Total 6 750
ITV ($9 000 –$ 6750) $ 2 250

Scrapping allowance ($2 250 – $1 000)* 90% $ 1125
212)
PROG: BSCAC
LEVEL: 2.1
YEAR : 2021
Recoupment(s8(1)(j))
Similar to accountant’s profit on disposal.
It should be included in gross income.
It is a recovery of capital allowances previously
granted.
Calculated as: Sales Proceeds less Income Tax Value
(ITV) of an asset.
Restricted to capital allowances previously granted.
If no capital allowances were granted, no recoupment is
calculated.
Calculate capital allowances over the life of the asset.
Grant full capital allowances in the year of acquisition,
none in the year of disposal.
Calculate Potential recoupment (Sales proceeds-ITV)
The lower of (i) capital allowances and (i) potential
recoupment=Actual recoupment.
Example
• Moon Company has been trading for the past 10 years.
The company had purchased furniture for $1 450 in the
year 2017 on which wear & tear had been granted. It
sold the furniture for $1 670 during the year 2020.
• Calculate recoupment.
Moon
Capital Allowances Schedule-Furniture
$
Cost(2017) 1 450
W&T 2017(10%X1 450) (145)
ITV 1 Jan 2018 1 305
W&T 2018(10%X1 305) (131)
ITV 1 Jan 2019 1 174
W&T 2019(10%X1 174) (117)
ITV 31 Dec 2019(a) 1 057
Sales proceeds(b) 1 670
Potential recoupment(b-a) 613
Moon
Total capital allowances=145+131+117=$393
Actual recoupment =lower of $613 and $393
=$393
For assets with restricted costs, also restrict selling
price as follows;
• Deemed Selling price =Deemed cost/Actual Cost

×Actual selling price.
Example
• Masawara Ltd acquired an S Class Mercedes Benz for its
Operations Director for $22 000 on 30 September 2018.
On 10 July 2020, the company sold the car for $18 000.
The company had elected for S.I.A on purchase of the
car.
• Calculate recoupment to be taxed in the hands of

Masawara Ltd.
Solution
Year 2018: S.I.A (25%* $10 000) $2 500
Year 2019: S.I.A (25% *$10 000) $2 500
ITV ($10 000 - $5 000) $5 000
Deemed selling price: (10 000 * 18 000)/22 000 $8181.82
Recoupment = ($8181.82 - $5000) $3181.82

Recoupment on damage of an asset
Recoupment should be calculated.
Compensation received is deemed to be sales proceeds.
However, no recoupment is calculated if;
A similar asset is acquired within 18months.
The asset is put to business use within 3 years.
Example
• MTC Communications had its factory building destroyed by fire
on 3 March 2020. The Income Tax Value of the building at the
date of destruction was $152 000, the company received
compensation of $230 000 from Eagle Insurance on 5 July 2020.
Calculate recoupment, if any, to be taxed in the hands of MTC
Communications in 2020 on the following assumptions:
(a) That the building was not replaced.
(b) That the building was replaced by February 2021 at a cost of
$240 000 and brought into use in May 2021.
(c) That the construction of a building was completed on 3 April
2022.
Recoupment on damage of an asset
Solution
(a) Recoupment: ($230 000 – $152 000) = $78 000, the
whole amount of $78 000 is taxed since the building was
not replaced.
(b) Recoupment: No recoupment, building completed
within 18 months and whole amount used.
(c) The whole amount of recoupment, i.e. (230 000 -152
000) = $78 000, will be taxed in full since the construction
exceeded 18 months.
Exam Tips:
If any of the following statements is included in a
question, it means that all the qualifying assets should
be granted S.I.A.
The taxpayer elected for S.I.A
The taxpayer was granted maximum allowances.
Calculate minimum taxable income/tax liability.
If the question is silent, it means Wear & tear was
granted on all the assets.
Exam Tips:
If the costs of the assets and their ITVs are given, you
should establish whether SIA or Wear and tear was
granted in the previous years.
Recalculate ITV assuming SIA was granted.
If it agrees with the given ITV, it means SIA was granted.
If it doesn’t agree, it means wear and tear was granted.
CHAPTER 7: CAPITAL ALLOWANCES(S15(2)(c)a.r.w
4th Schedule
Example
KM (Private) Limited is a Zimbabwean incorporated company based in Chinhoyi
industrial area. The company is in the business of manufacturing various plastic
products. On 1 January 2020, the following assets were shown in its asset register:
Assets Cost ($) Year acquired Month ITV($)
Industrial land 500 000 2018 January 500 000
Delivery truck 10 000 2019 July 9 000
Computers 4 000 2017 January 1 000
Warehouse 50 000 2019 January 48 750
Factory building 200 000 2017 February 170 000
Mercedes Benz 20 000 2019 December 7 500
Industrial machinery 30 000 2019 March 22 500
4th Schedule
Example
Additional information
1. The company disposed the existing machinery for $ 24 000 on 30 June 2020 and
replaced it with a new machinery which was bought for $ 50 000. The cost of
bringing the machinery to its useful state was incurred as follows:
• Import duty (Beitbridge border post) $2 500
• Installation $ 1 500
• Alteration of the factory building so as to fit the new machinery$ 2 000
2. The company bought a Nissan Primera for the finance director on 20 February
2020, for $14 000.
3. The delivery truck was involved in an accident on 30 October 2020, the
insurance company paid the company $9 000 in compensation. The directors have
since found a similar tuck for replacement.
4th Schedule
Example
• Required
• Calculate the maximum allowances and income to be included in the
computation of tax liability for KM. [20
marks]
4th Schedule
Schedule of Capital Allowances-MN
Asset Cost/ITV($) SIA or W&T rate Capital Allowance($) ITV($)
Delivery truck 9 000 W&T@20% 1 500 7 500
Computers 4 000 SIA@25% 1 000 -
Warehouse 50 000 W&T@2.5% 1 250 47 500
Factory Building 200 000 W&T@5% 10 000 160 000
Benz 10 000 SIA@25% 2 500 5 000
Machinery(old) 30 000 SIA@25% 7 500 15 000
Machinery(new) 56 000 SIA@25% 14 000 42 000
Nissan Primera 10 000 SIA@25% 2 500 7 500
40 250
4th Schedule
Recoupment on Old Machinery
$
Sales proceeds 24 000
Less ITV (15 000)
Potential recoupment 9 000(a)
Capital allowances granted 15 000(b)
Actual recoupment 9 000( lower of (a) and (b))

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TAX LAW & PRACTICE(CUAC

Recoupment Profit on Disposal

Scrapping Allowance Loss on Disposal

ITV ($9 000 –$ 6750) $ 2 250

• Deemed Selling price =Deemed cost/Actual Cost

• Calculate recoupment to be taxed in the hands of

Deemed selling price: (10 000 * 18 000)/22 000 $8181.82

Recoupment = ($8181.82 - $5000) $3181.82

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