TAX PLANNING

Presentation
By

Gumisai Jacob Gutu

Lecture objectives:
1. To define Tax planning
2. Aspects of Tax planning
3. Tax planning scenarios/options
4. Tax avoidance versus evasion
5. Limitations of tax planning
The motivation for planning

• “Proper, Prior, Planning, Prevent, Poor,

Performance.”
Main focus and definition
Tax planning
Definition of tax planning:
• Is an arrangement of one’s financial affairs in such a way that without
violating, in any way, the legal provisions of tax legislation, full advantage
is taken of all exemptions, deductions, rebates and reliefs permitted under
the tax Acts, so that the burden of the taxation on an assessee, as far as
possible, is the least. Mehrotra & Goyal (2022).
• It involves analysing all taxes i.e. income tax, capital gains tax, VAT and
estate duty.
• A plan that minimises income tax but increases estate duty is not the best of
plans.
Aspects of tax planning
1. Tax consultants suggest tax planning initiatives
that assist taxpayers to transact to best advantage,
that is, making a wide range of decisions that
facilitates minimisation or postponement to a later
date of tax liabilities. It may also mean making the
best use of losses.
Aspects of tax planning
2. Utilisation of tax provisions, that is, elections/options
which brings tax relief to a wide spectrum of taxpayers
from individuals to groups of companies.
3. Understanding all tax laws allows the accountant or
the planner to focus not just on the tree but on the
complexities of the whole forest. Being mindful though
of the fact that for there to be a forest, the tree should be
good.
Precautions in tax planning
1. Tax planning requires analysis of the tax implication of any
decision involving finance. Such analysis should precede the
decision, for once the decision has been implemented in
ignorance of law, the tax obligations have to be met. Thus, tax
planning presupposes thorough knowledge of tax laws so that
the best alternative or choice may be thought of in order to
attract least tax liability.
2. Tax planning cannot be attempted in isolation. Due attention
has to be paid to all laws and economic factors as well.
Precautions in tax planning
3. Tax planning should not be based on tax avoidance. The tax
avoidance is based on availing of certain loopholes in the laws.
Whenever the loopholes come to light they will be checked by
amendments in the law. Consequently, the planning based on
such loopholes will fail.
4. Tax planning should not be based on the basis of decisions
made by courts. When a decision is not in consonance of the
intent of the legislature, sometimes the law is amended
retrospectively or prospectively.
Precautions in tax planning
5. Tax planning is done for a financial activity which a person
proposes to carry out in near future. The taxpayer should be
aware of discontinued and new provisions, otherwise, a wrong
decision will be made.
6. Tax planning presupposes thorough knowledge of tax laws
where the best alternative is made in order to attract least tax
liability. So there should be a choice even if that means
claiming an expense incurred as a deduction.
Need for tax planning
1. Reduction in tax liability.
2. Minimisation of litigation.
3. Productive investment – A proper tax planning will instil
discipline to the planner, the hard earned cash will be
invested wisely and shuns going to the Government for
waste and ostentation.
Need for Tax Planning
4. Reduction in cost – incidence of tax (direct and indirect)
forms a part of cost production. The reduction of tax by tax
planning reduces the overall cost. It results in more sales, more
profit and more tax revenue.
5. Healthy growth of economy: The growth of a nation
depends upon the growth of its citizens.
6. Employment generation – the amount saved through tax
planning is generally invested in commencement of new
undertakings or expansion of the business.
Tax planning scenarios
1. Group companies
When non-current assets of a business are
disposed, that may result in recoupment or capital
gains. Both recoupment and capital gain are
taxable. We are not concerned much when such a
disposal results in a scrapping allowance or capital
loss which are deductible for tax purposes.
Tax planning scenarios
1. Recoupments may be defined as a recovery of allowances
previously granted on the asset so disposed.
Formulae for recoupment: Proceeds or original cost, whichever
is lower Less Income Tax Values (ITVs) of the asset sold.
• Where the cost of the asset had been previously restricted,
there will be a need to get deemed proceeds and compare
with deemed cost, then less ITV.
Tax planning scenarios
The election for Group Companies:
• To avoid taxable income: Make an election in
terms of Paragraph 8(3) of the 4th Schedule of the
ITA (CAP 23:06)
• To avoid taxable gain: Make an election in terms
of Section 15 of the Capital Gains Tax Act (CAP
23:01)
Tax planning scenarios
2. Group reconstructions
The relief provided by para 8(3) of the 4 th
Schedule of the Income Tax Act is available where
change of ownership of the assets occurs in the
course of a scheme of reconstruction, merger or
business operation;
Tax planning scenarios
Or a scheme of localisation of an international
group to a local subsidiary; or a scheme of
converting a company registered under the
Companies and Other Entities Act (CAP 24:03) to
a private business corporation in terms of Private
Business Corporations Act (CAP 24:11) or vice
versa.
Tax planning scenarios
The making of the election provided for in the
paragraph provides for the transfer of the assets so
disposed at income tax values (ITVs) reflected in
the books of the transferor company at the time of
disposal, notwithstanding the actual terms of the
sale agreement. If the election is made,
recoupment does not arise.
Tax planning scenarios
It is further provided that where this election is
made, on disposal of such assets to 3 rd parties
outside the group of companies under the same
control, recoupment shall be calculated as if the
disposing company always owned the assets. This
means that the cost for the purpose of calculating
recoupment will be the actual original or deemed
original cost of the asset.
Tax planning scenarios
3. Capital Gains Tax Provisions
Sec 15 of the CGT Act (CAP 23:01) stipulates that
where specified assets for capital gains tax
purposes are transferred under any of the schemes
discussed above, the parties may elect that they
transfer the assets for capital gains tax purposes at
values equal to the deductions available to the
transferor company.
Tax planning scenarios
This means that any potential capital gains on disposal
is postponed to such a time when such asset is sold
outside the group under the same control.
When that asset is finally sold to a 3rd party outside the
group under same control, the cost shall be calculated as
if the original transferor retained ownership of the asset
at all times.
Tax planning scenarios
Example 1:
Austin International Ltd, a company incorporated
in England, has been operating in a number of
African countries. In a scheme of reconstruction
of its operations in Zimbabwe has formed a new
company incorporated in Zimbabwe in which it
owns 71% of the issued share capital.
Tax planning scenarios
The new company, Austin Zimbabwe (PVT) Ltd
took over the operations of the local branch of
Austin International Ltd with effect from 1
January 2022. The business assets taken over were
as follows:
 Tax planning scenarios
Business assets Original ITV Sale
Cost 31-12-21 Price
$ $ $
Motor vehicles 540,000.00 135,000.00 535,000.00
Manufacturing 850,000.00 212,500.00 745,000.00
machinery
Industrial building 760,000.00 646,000.00 822,000.00
Commercial 50,000.00 37,500.00 55,000.00
building
Office Equipment 93,000.00 23,250.00 91,500.00
Tax planning scenarios
Required:
Outline the tax implication of the reconstruction in
relation to the business assets taken over, and suggest
ways of minimising any tax liability arising from the
reconstruction if Austin International had held the assets
for 5 years.
Tax planning scenarios
Example 1
Work out:
• Recoupment on assets sold, and
• Capital gains realised on the disposal specified
assets
Tax planning scenarios
Example 2:
Taking the facts from Example 1, assume Austin
Zimbabwe P/L, after using the business assets for two
years claiming maximum allowances possible; decides
to then sell the Industrial Building and the motor
vehicles to a company which is not associated to the
group for $925 000 & $630 000,00 respectively. What
is the tax treatment?
Tax planning scenarios
Example 3:
Arise Limited and Fall Limited are companies in a group of companies under the
same control. Fall Limited sold the following non-current assets to Arise Limited:
Business Asset Original Cost ($) Selling Price ($)

Industrial Building 980 000 2 080 500

Passenger Motor 930 100 650 100

Vehicle(1)
Manufacturing 277 000 216 300
Machinery
Office equipment 120 500 88 900

Commercial Building 4 500 000 5 000 000

Tax planning scenarios
The sale was made at the end of the year in which the assets
were either bought or constructed (This means that the assets
were disposed after being used for 1 year). All these assets
were being used for more than 90% in Fall Limited’s business.
Management had resolved that Fall Limited should claim all
the capital allowances available and at their maximum possible
values or rates.
Tax planning scenarios
Below is a schedule outlining how these assets were acquired by Fall limited:
i) Industrial building was constructed
ii) Passenger motor vehicle was bought
iii)Manufacturing Machinery were bought
iv)Office equipment was bought
v) Commercial building was bought.
The assets were taken over effective 1 January 2023 and we are at the end of December
2023.
Tax planning scenarios
Required
Outline the tax implication if this was a scheme in furtherance
of a merger in relation to the business assets taken over.
Suggest ways of minimising any tax liability arising from the
scheme.

Do this exercise in Twos

Tax planning scenarios
Example 3:

Workout the suggested solution in groups for both

recoupment (income tax) and capital gains tax.

• Invite questions and discussions.

Tax avoidance versus tax evasion
Definitions:
• It is an art of dodging tax without actually breaking the
law (Mehrotra & Goyal, 2022)
• It is a method of reducing tax incidence by availing of
certain loopholes in the law.
Tax avoidance definition
• In other words, ‘tax avoidance’ is a device which technically
satisfies the requirement of the law but in fact it is in
accordance with the legislative intent.
• Per Jagadisan J. [in Aruna Group of Estates Vs State of
Madras (1965) 55 ITR 642 (Mad.), “Avoidance of tax is not
tax evasion and it carries no ignominy with it, for it is a
sound law and; certainly, not bad morality, for anybody to so
arrange his affairs as to reduce the brunt of taxation to a
minimum.”
Court perceived challenges with tax
avoidance
a) Substantial loss of much needed public revenue;
b) Serious disturbance caused to the economy of the country
by piling up of mountains of black money directly causing
inflation;
c) Large hidden loss to the community by some of the best
brains in the country being involved in perpetual war
waged between the tax avoider and his expert team of
advisers, lawyers and accountants on one side, tax officer
perhaps with no qualified adviser on the other side.
Court challenges with tax avoidance
d) Sense of injustice and inequality which tax avoidance
arouses in the breasts of those who are unwilling or unable to
profit by it;
e) Ethics (or lack of it) of transferring the burden of tax
liability to the shoulders of guideless, good citizens from those
of artful dodgers. [McDowell & Co, Ltd Vs Commercial Tax
Officer (1985) 154 ITR 148]
Tax evasion
Definition of tax evasion:
• Tax evasion on the other hand embraces all those activities
that are undertaken by Taxpayers to free themselves from
paying tax without regard for the law.
• When a person reduces his total income by making false
claims or by withholding the information regarding his real
income, so that his tax liability is reduced.
Tax evasion
• Tax evasion is not only illegal but it is also immoral, anti-
social and anti-national practice.
• There are heavy penalties and institution of prosecution
proceedings against tax evaders.
Tax avoidance versus evasion
Examples of tax evasion include:
• Falsification of records
• Failure to disclose income received
• Providing false answers wilfully
• Sections 81 to 87 of the ITA outlines the types of
offences which fall under tax evasion.
• The remedies are in the Act as well and they include the
charging of PENALTY at 100%
Tax avoidance versus tax evasion
Case Law:
i) Ayreshire Pullman Motor Services and D M Ritchie
Vs IRC
Lord Clyde said, “….. No man in this century is under
the smallest obligation, moral or other, .. to arrange his
legal relations to his business or property, as to enable
the Inland Revenue to put the largest possible shovel
into his stores.
Tax avoidance versus evasion
The Inland Revenue is not slow and quite rightly – to
take every advantage which is open to it under the
taxing statutes for the purpose of depleting the
Taxpayer’s pocket. And, the taxpayer is, in like manner,
entitled to be astute to prevent, as far as he honestly can,
the depletion of his means by the Revenue…”
Tax avoidance versus evasion
ii) Duke of Westminister Vs Inland Revenue
Commissioners
Lord Tomlin said: “Every man is entitled, if he can to,
order his affairs so that the tax attaching under the
appropriate Acts is less than it would otherwise be. If he
succeeds in ordering them so as to secure this result, then,
however unappreciative the Commissioners of Inland
Revenue or his fellow Taxpayers may be of his ingenuity,
he can not be compelled to pay an increased tax.”
Tax avoidance versus evasion

The two cases of law clearly shows that tax avoidance is

legal while tax evasion is illegal.
Tax avoidance versus evasion
However, even though tax avoidance is legal, the
Commissioner is given authority by Sec 98 (Anti-
avoidance section) to set aside, undo or ignore any
transaction if he is of the opinion that the transaction is
abnormal and the purpose was to avoid tax. He can
invoke the fair market price in any transaction if he is
persuaded to do so by the facts of the case. Eg Thin
Capitalisation rules etc
Tax avoidance versus evasion
NB: Research on Zimbabwean Thin Capitalisation
Rules (s16q) & Transfer Pricing Rules (s98B a.r.w 35th
Schedule of the Income Tax Act Chapter 23:06)
Limitations regarding tax planning
1. Practicability
Before saving tax on income one must have the income.
Impoverishment of the TP should never be the result of
an eager plan to save taxes.
2. Other taxes
The saving of income tax should be weighed against the
possible effects of increasing other taxes eg transfer
charges on property.
Limitations regarding tax planning
3. Domicile of the Taxpayer
Uprooting a taxpayer from his native habitat, family and
friends in order to settle him in a tax haven could be unwise.
4. Adverse effects on contracting parties
A non-taxable gain for one party will most probably lead to the
other party failing to be allowed a corresponding tax deduction
hence this should be discussed at the negotiation stage
Limitations regarding tax planning
5. Revenue has the final word
Tax advisers would only be able to carry out the
practice as long as the results are broadly accepted
by the fiscal authorities.
- Should tax advice get too far, legislation may be
changed. Eg EPZ employee allowances issue.
Further study and assignment
Research on how assessed losses can be useful for tax
avoidance.

Working as an employee as compared to being a

consultant