university of zambia bachelor of science course name

UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE EDUCATION

BACHELOR OF SCIENCE

(ACCOUNTING AND FINANCE)

COURSE NAME: PRINCIPLES OF TAXATION (BAF 2011)

MODULE TITLE: INTRODUCTION TO TAXATION AND TAXATION OF

INDIVIDUALS

(MODULE 1)

2016

The University of Zambia, Institute of Distance Education

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The University of ZambiaInstitute of Distance EducationGreat East Road CampusP.O. Box 32379Lusaka, Zambia

Land Cell: 0978 772248/0978 772249Fax: +260 211 290 719 /260 211 253 952E- Mail: [email protected] Care Line: 0971778753www.unza.zm© Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system, or transmitted in any form or by any means, electronic or mechanical, including

photocopying, recording or otherwise without the permission of the publisher.


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mailto:[email protected]

ACKNOWLEDGEMENTS

The University of Zambia (UNZA), Institute of Distance Education (IDE) wishes to thank

Mr. Arnold Machila for writing this module 1, INTRODUCTION TO TAXATION AND

TAXATION OF INDIVIDUALS for the course PRINCIPLES OF TAXATION (BAF

2011).


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Table of Content

Introduction....................................................................................................................... - 7 -

Aim....................................................................................................................................- 7 -

Objectives..........................................................................................................................- 7 -

Structure of the Module.................................................................................................... - 8 -

Applicable Tax Rates..........................................................................................................-8-

Assessment...................................................................................................................... - 12 -

Prescribed Readings........................................................................................................ - 12 -

Recommended Readings................................................................................................. - 12 -

Time frame...................................................................................................................... - 13 -

Study skills.......................................................................................................................- 13-

Need help?.......................................................................................................................- 14 -

UNIT 1............................................................................................................................ - 15 -

The tax system……………………………………………………………….....-15-

1.1 Introduction……………………………………………………………………...-15-

1.2 Objectives………………………………………………………………………..-15-

1.3 Definitions……………………………………………………………………….-15-

1.3.1 Characteristics of a Good Tax System…………………………………..-16-

1.2 The Overall Function and Purpose of Taxation in a Modern Economy………...-16-

1.3 Different Types of Taxes………………………………………………………...-17-

1.4 Principal Sources of Revenue Law and Practice………………………………...-19-

1.5 Charge year……………………………………………………………………...-20-

1.6 Roles of Zambia Revenue Authority and Ministry of Finance in Taxation….….-20-

1.6.1 Organisation structure of Zambia Revenue Authority……………….….-21-

1.6.2 Domestic Taxes Division…………………………………………….….-22-

1.6.3 Customs and Excise Division…………………………………………....-22-

1.6.4 Advice Centres…………………………………………………………..-22-

1.7 Tax avoidance and tax evasion………………………………………………......-22-

1.7.1 Tax Evasion……………………………………………………………...-22-

1.7.2 Tax Avoidance………………………………………………………......-23-

1.7.3 Professional Ethical Guidance………………………………………......-23-

1.8 Exercise………………………………………………………………………….-23-The University of Zambia, Institute of Distance Education

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1.9 Summary………………………………………………………………………...-24-

UNIT 2……………………………………………………………………………….….-25-

Income tax liabilities…………………….…………………………………….-25-

2.1 Introduction……………………………………………………………………..-25-

2.2 Objectives……………………………………………………………………….-25-

2.3 The scope of income tax………………………………………………………...-26-

2.4 Computing taxable business profits for individual sole traders………………..- 30-

2.5 Capital allowances……….………………………………………………….…..-45-

2.5.1 Scope of Capital allowances……….………………………………………..…..-45-

2.5.2 Capital allowances on Implements, Plant and Machinery…………….………..-46-

2.5.3 Capital allowances on Industrial buildings……………………………………..-57-

2.5.4 Capital allowances on Commercial buildings…………………………….…….-66-

2.6 Exercise…………………………………………………………………………-66-

2.7 Summary………………………………………………………………………..-67-

UNIT 3

Taxation of income from Partnership and Self - employment

3.1 Introduction………………………………………………………………..…..-69-

3.2 Objectives………………………………………………………………..…….-69-

3.3 Partnership Business……………………………………………………..…….-70-

3.3.1 Joint Return………………………………………………….………….……..-70-

3.3.2 Insurance Issues…………………………………………………………..……-71-

3.3.3 Computation of Partnership Taxable Profits……………………………..…....-71-

3.3.4 Appropriation of Profits and Losses…………………………………..………-72-

3.3.5 Changes in Partnership……………….……………………………………..….77-

3.3.6 Loss Relief……………………………………………………………….……-79-

3.8 Presumptive Taxes……………………………………………………….……-79-

3.9 Exercise……………………………………………………..…………………-86-

3.10 Summary………………………………………………………………………-87-

UNIT 4

Taxation of income from employment The University of Zambia, Institute of Distance Education

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4.1 Introduction……………………………………………………………….……-88-

4.2 Objectives………………………………………………………………….…...-88-

4.3 Emoluments, employment and office……………………………………..……-89-

4.4 Employment compared with self-employment……………………………...….-89-

4.5 Tax Implication…………………………………………………………..….….-92-

4.6 Basis of assessment for emoluments………………………………….…….….-93-

4.7 Taxable and exempt emoluments…………………………………………..…..-94-

4.8 Allowable expenses………………………………………………….…..……..-99-

4.9 Taxation of payments made on termination of employment………………….-101-

4.10 Operation of the Pay As You Earn system……………………………………-109-

4.11 Exercise……………………………………………………………………….-112-

4.12 Summary………………………………………………………………………-113-

5.0 Module Summary……………………………………………………………..-114-

Further Readings……………………………………………………………………..-115-


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Introduction

Welcome to Module I, Introduction to Taxation and Taxation of Individuals (Principles of

Taxation).

You may realize that among many other roles that the modern accountant assumes, is that

of tax consultant and agent. This module therefore introduces you to the tax system and tax

treatment of individuals and covers the basic provisions of the tax rules as they relate to

the taxation of individuals. The module also focuses on concepts of gross income,

exclusions, deductions, exemptions, and credits, as well as property transactions. It covers

the tax aspects of sole traders and partnerships under the income tax system. The module

also focuses on the taxation principles of income from employment and from self-

employment.

Aim

The aim of this module is to enable you as student accountant develop an understanding of

the scope of taxation, how it is administered, computation of various taxes and the need to

file a tax return for an individual.

Objectives

By the end of the module, you should be able to:

(i) Explain the principles of taxation and the role played by taxation in the economy

(ii) Calculate taxable income payable for an individual taxpayer’s businesses and

Income Tax payable on emoluments from employment and how it is paid.

(iii) Calculate income tax payable by individual trading under a partnership and also tax

payable from self-employment.

(iv) Describe the various assets and expenditure on which capital allowances are

available for an individual and how to calculate those allowances.

(v) Explain the principles governing turnover tax and Pay as You Earn System


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Structure of the Module

As you can see from the table of content above, the module is divided into four (4) units.

Each unit is in turn divided into several sub-units. Each unit has a core text and an

exercise at the end. You are required to read the text and thereafter attempt the exercise

before proceeding to the next unit. Further take note that the tax rates used in this module

related to 2016. Please refer to the schedule below for the applicable tax rates for all

workings in module. However, these tax rates are subject to change each tax year and you

are expected to refer to the latest practice notes or budget highlights for such changes.

TAXATION TABLE FOR THE CHARGE YEAR 2016

1. Income Tax

(a) Individual income tax rates

Income band Taxable amount Rate K1 to K36,000 first K36,000 0% K36,001 to 45,600 next K9,600 25% K45,601 to K70,800 next K25,200 30% Over K70,800 35%

(b) Income from farming for individuals

K1 to K36,000 first K36,000 0% Over K36,000 10%

(c) Gratuity

Note that gratuity is now tax exempt under the provision of the amended constitution.

(d) Terminal benefits


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Terminal benefits are now tax exempt.

2. Company Income Tax rates

On income from manufacturing and other 35% On income from farming 10%

On income of Banks and other Financial Institutions 35%

On income from processing of purchased mineral ores, concentrates and other

semi-processed minerals 30%

On income from Tolling 30%

On income from mining operations of industrial minerals 30%

(Variable profit tax rate – industrial metals) y = 30% + [a - (ab/c)]

Where: y = the tax rate to be applied per annum

a = 15%

b = 8%

c = Assessable Income x 100%

Gross sales

3. Mineral Royalty

Underground Mining operations 8%

Opencast Mining operations 20%

Mining of industrial minerals 6%

4. Capital Allowances

(a) Implements, plant and machinery and commercial vehicles:

Wear and Tear allowance - Plant used normally 25%

- Used in Manufacturing, Farming, Leasing 50%

(b) Non-commercial vehicles Wear and Tear Allowance 20% (c) Industrial Buildings: Wear and Tear Allowance 5% Initial Allowance 10% Investment Allowance 10% (d) Low Cost Housing (Cost up to K20,000) Wear and Tear Allowance 10% Initial Allowance 10%


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(e) Commercial Buildings

Wear and Tear Allowance 2%

(f) Farming Allowances

Development Allowance 10% Farm Works Allowance 100% Farm Improvement Allowance 100%

5. Presumptive Taxes

(a) Turnover Tax 3%

(b) Presumptive tax for transport

Seating capacity Tax per annumTax per day

K K

Less than 12 passengers and taxis 1,200.00 3.20

From 12 to 17 passengers 2,400.00 6.60





From 64 passengers and over 14,400.00 39.40

6. Property Transfer Tax

Rate of Tax on Realised Value other than mining rights 10%

Rate of Tax on Realised Value on a transfer or sale of mining right 10%

7. Value Added Tax

Registration threshold K800,000.00

Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

8. Customs and Excise

Duty rates on:

(a) Motor cars and other motor vehicles (including station wagons) principally

designed for the transport of less than ten persons, including the driver:The University of Zambia, Institute of Distance Education

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Customs Duty: 25%

Excise Duty:

Cylinder capacity of 1500 cc and less 20%

Cylinder capacity of more than 1500 cc 30%

(b) Pick-ups and Trucks/lorries with gross weight not exceeding 20 tones:

Customs Duty 15%

Excise Duty 10%

(c) Buses/coaches for the transport of more than ten persons

Customs Duty: 15%

Excise Duty :

Seating capacity of 16 persons and less 25%

Seating capacity of 16 persons and more 0%

(d) Trucks/lorries with gross weight exceeding 20 tones:

Customs Duty: 15%

Excise Duty : 0%

The minimum amount of Customs Duty on Motor Vehicles in categories from

(a) up to (c) above is K2,000.00

Assessment

Continuous assessment 40%

1 Assignments 10%

1 Group/syndicate work 10%

Residential school Test 20%

Final examination 60%


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Prescribed Readings

Hassan, Mohammed Mulenga, Taxation in Zambia , ZICA. Multimedia Zambia, Lusaka

Mulolani, C.A (2015). Foundation Taxation, 7th edition, Zambia Publishing House,

Lusaka.

Zambia Revenue Authority Practice Notes (2016). https://www.zra.org.zm

Recommended Readings

ZICA Study Manual. ( 2016). Taxation T5, BPP Learning Media, BPP House, Aldine

Place, London.

Apart from this module, you are expected to read widely around all the topics covered in

the module. You may find the references provided at the end of the module useful, but you

could also explore other sources of information, particularly the Zambia Revenue

Authority website which have invaluable information.

Time frame

You are expected to spend at least 60 hours of study time on this module. In addition, there

shall be arranged contacts with lecturers from the University from time to time during the

course. You are requested to spend your time judiciously so that you reap maximum

benefit from the course.

Study Skills


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As an adult learner, your approach to learning will be different to that from your school

days: you will choose what you want to study, you will have professional and/or personal

motivation for doing so and you will most likely be fitting your study activities around

other professional or domestic responsibilities.

Essentially you will be taking control of your learning environment. As a consequence,

you will need to consider performance issues related to time management, goal setting,

stress management, etc. Perhaps you will also need to reacquaint yourself in areas such as

essay planning, coping with examinations and using the internet as a learning resource.

Your most significant considerations will be time and space i.e. the time you dedicate to

your learning and the environment in which you engage in that learning.

I recommend that you take time now—before starting your self-study—to familiarize

yourself with these issues. There are a number of excellent resources on the web. A few

suggested links are:

http://www.how-to-study.com/

The “How to study” web site is dedicated to study skills resources. You will find

links to study preparation (a list of nine essentials for a good study place), taking

notes, strategies for reading text books, using reference sources, test anxiety.

http://www.ucc.vt.edu/stdysk/stdyhlp.html

This is the web site of the Virginia Tech, Division of Student Affairs. You will

find links to time scheduling (including a “where does time go?” link), a study

skill checklist, basic concentration techniques, control of the study environment,

note taking, how to read essays for analysis, memory skills (“remembering”).

Need help?

In case you have difficulties during the duration of the course, please get in touch with the

Director, Institute of Distance Education, or the resident lecturer in your province.


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http://www.ucc.vt.edu/stdysk/stdyhlp.html

http://www.how-to-study.com/

Your lecturer can be contacted for routine enquiries at: Institute of Distance Education,

University of Zambia, Great East Road Campus, PO Box 32379, Lusaka, Zambia,

during working days (Monday-Friday) from 08:00 to 17:00 hours on Telephone:

+260211290719; Fax: +260211253952; E-mail: [email protected]; Website:

www.unza.zm. You can also see your lecturer at the office during working hours and days

as stated above. You could also utilize the services of the phone as well as the email

address. For other details, you may visit the website as stated above.

You are free to utilize the services of the University library which opens from 0700 hours

to 2400 hours every working day. As for weekends and public holidays, the library opens

from 0900 hours to1800 hours. It will be important for you to carry your student identity

card for you to access the library and let alone borrow books.

UNIT 1

The Tax System

1.1 Introduction

This Unit introduces you to what taxation is all about and the various kinds of taxes. You

will also be taken through the various sources of tax law and the roles of the revenue


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http://www.unza.zm/

authority. It is anticipated that by introducing you to this unit, you will be able to work

through the units that follow with confidence.

1.2 Objectives

By the end of this unit you should be able to;

i) Explain the scope and purpose of taxation;

ii) Describe the main classification of taxes

iii) Explain the structure of tax legislation and case law’s role in taxation

iv) Explain the concept and importance of a charge year in taxation

v) Explain the role of the Zambia Revenue Authority in taxation and how it structured

1.3 Definition

Let us begin by defining what taxation mean. You might have heard people talk about

taxation or taxes. Just what is taxation or a tax?

Taxation may be defined as the means by which a government raises revenue by levying

(charging) income and gains for people and businesses resident in that particular country.

A tax may be defined as a compulsory contribution to state revenue, levied by the

government on workers' income and business profits or added to the cost of some goods,

services, and transactions.

1.3.1 Characteristics of a good Tax System

Here are some of the good characteristics of a good tax system.

a) Taxes should not be so high as to make production expensiveb) Taxes should be easy and cheap to collectc) Taxes should be certain and tax rules easy to understandd) Taxes should be levied on the basis of ability to pay with equitye) Taxes should be efficient to collect

1.4 The Overall Function and Purpose of Taxation in a Modern Society

1.4.1 Economic factors


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Here you are expected to know the role of taxation from the economic point of view.

Taxation policies have been used to influence economic factors such as employment

levels, inflation and investments. This has been done by providing tax incentives to

organisations and individuals who are involved in certain business activities that contribute

to economic growth. For example, you may be aware that companies are given tax relief

through what is known as capital allowances on buildings, implements and plant and

machinery to promote investments in those assets. Some of the goods imported are

exempted from payment of certain taxes such import duty and or value added tax to

encourage individuals and business persons to investment more.

Taxation policies are also used to direct economic behaviors of individuals and businesses.

For example they encourage individual saving habits (individual savings accounts), and

giving to charity.

Spending by the government and the system of taxation impacts on the economy of a

country as well. In Zambia government is the largest employer as of now.

1.4.2 Minimising the practices that harm the wellbeing of the environment.

Can you think of examples that show how governments can use taxes to discourage

environmental pollution? One such example is that, they may discourage motoring through

fuel duties, smoking and alcohol by increasing duties and taxes that relate to trading or

importation of cigarettes or alcoholic beverages and environmental pollution using taxes

such as landfill tax in cases of mining related activities. As government objectives change,

taxation policies may be altered accordingly.

1.4.3 Social justice

The taxation system accumulates and redistributes wealth within a country. Imagine if both

people with a lot of money and those with less money were to pay the same amount of

taxes. This may be perceived as unfair. That is the reason why different taxes have

different social effects such as those discussed below.

(a) Progressive taxation:

As your income rises, the proportion of taxation also rises. Examples of such a tax could

be Pay As You Earn (PAYE) in Zambia and Income tax in the UK.The University of Zambia, Institute of Distance Education

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(b) Regressive taxation

Under this type of a tax, as your income rises the proportion of taxation paid falls. For

example, tax on cigarettes is the same regardless of the level of income of the purchaser.

Therefore, as income rises the proportion of tax in relation to tax is represented as a lower

proportion of income.

(c) Proportional taxation

As income rises the proportion of tax remains constant, for example Latvian/Lithuanian

income tax

(d) Ad Valorem principle

This is a tax calculated as a percentage of the value of the item on which it is calculated

on. An example to this kind of tax is Value Added Tax.

1.4.4 Revenue generation for the government

The primary purpose of taxation is to raise revenue for central government. The revenue

raised is used to provide public goods and services such as education, health,

infrastructure, security and many more.

1.5 Types of taxes

1.5.1 Direct Taxes

These are taxes that are levied directly on the income and gains of individuals and

businesses. Normally a percentage of the income or gain is paid in the form of a tax.

Examples of direct tax that you should know are Income tax, mineral royalty and property

transfer tax.

1.5.2 Indirect Tax

These are taxes that are collected via an intermediary who later passes them on to the

government for at stipulated intervals. An example of indirect tax is Value Added Tax

(VAT) where the consumer pays VAT to a supplier, who then pays to the government

through the revenue authority such as Zambia Revenue Authority.


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1.5.3 Capital Taxes

If you have land or building that you want to sale, you will have to pay capital tax.

These are taxes on capital receipts. A capital receipt is an amount of receipt resulting from

a disposal (sale) of capital item. An example of a capital tax is property transfer tax.

1.5.4 Revenue Tax

These are taxes levied on revenue receipts. A revenue receipt is a receipt resulting from a

disposal of a non-capital item. An example of revenue tax is Turnover tax or income tax.

1.5.5 Regressive Tax

These are taxes that represent a smaller proportion of a person’s income. As income of that

person rises, the average rate falls. Value Added Tax is a regressive tax because the rate of

VAT is the same on the same good whether that good is bought by the rich person or by a

poor person.

1.5.6 Progressive Tax

These are taxes that represent a larger proportion of the person’s income. As that person’s

income rises, the average rate of taxation rises. The rate of tax for lower levels are less

than the tax rates for higher income levels. An example of progressive taxes are income

tax.

1.5.7 Proportional taxes

These are taxes where the percentage of income paid in taxation always stays the same.

The average rate of taxation is constant irrespective of the level of income.

1.6. Sources of tax law

1.6.1 Tax legislation or StatutesThe University of Zambia, Institute of Distance Education

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Statutes (Acts of Parliament) are laws made through parliament and make it legal for taxes

to be levied. Adherence to statutes is mandatory. In Zambia, the main statutes that governs

taxes include the following:

The Zambia Revenue Authority Act under which the ZRA was set up The Income Tax Act that governs income tax The Value Added Tax Act which governs VAT The Customs and Excise Act that governs customs and excise duties

1.6.2 Statutory Instruments

The Government may issue Statutory Instruments which are detailed notes on an area of

tax legislation. These are delegated legislation issued by a government minister. In Zambia

these are issued from time to time by the Minister of Finance.

1.6.3 Case law

You should be aware that judges cannot make tax law. However, decided cases in taxation

assist with interpretation of particular tax statutes which relates to specific circumstances

of a case before the judge. The rulings on tax cases in the courts are binding and so provide

guidance on the interpretation of tax legislation.

1.6.4 Tax Authorities guidance

These are issued to provide appropriate interpretation of statutes due to the complexity of

the legislation.

In the case of Zambia, the Zambia Revenue Authority issues the following;

(a) Practice Notes. These sets out how the Zambia Revenue intends to apply the law. These

are normally issued following amendments to tax legislation.

(b) Extra statutory concessions – sets out circumstances in which will not apply the strict

letter of the law where it would be unfair to do so.

(c) Internal guidance manuals – ZRA’s own manuals which are available to the public


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(d) Press releases – provide details of a specific tax issue, for example, used to

communicate the information stated in the annual budget

(e) Pamphlets – provide explanations of various tax issues in non-technical language.

1.7 Charge year

When it comes to tax computation and filing in a return, we normally talk about a charge

year. We will now look at what a charge year is.

Definition: A charge year is a period of one year for which tax is chargeable. It is a year in

which you assesses taxes. Income and gains for your business or yourself arising in a

particular year are taxable in that charge year.

In Zambia, a charge year runs from 1 January to 31 December. For example, the charge

year for 2015 runs from 1January 2015 to 31 December 2015. You should remember a

charge year is very important when dealing with income tax because amendments to

Income Tax Act are generally effected from 1 January. Therefore, a charge year is a year in

relation to which taxes are levied or charged.

1.8. The Roles of the Zambia Revenue Authority and Ministry of Finance in Taxation

Let us now talk about the roles of the Zambia revenue authority and the ministry of

finance.

The Ministry of Finance and National Planning is responsible for the formulation of tax

policy, in Zambia and the implementing agency is the Zambia Revenue Authority (ZRA).

The legislative framework relating to the regulation and administration of the taxation is

provided for in the Income Tax Act 1966, as amended. The source of income and residence

are the basis for liability to tax under the Zambian tax regime.

The Zambia Revenue Authority (ZRA) was established on 1 April 1994 as a corporate

body under the 1993 Act of Parliament. Under this Act, ZRA is charged with the

responsibility of collecting revenue on behalf of the government under the supervision of

the Minister of Finance. The goal of the Zambia Revenue authority is to maintaining the

key principles of efficiency in taxation, maintaining equity (fairness) through a broadened The University of Zambia, Institute of Distance Education

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tax base and simplicity of tax administration and compliance process. The Authority is also

expected to advise the government on matters of taxation policy.

The main responsibilities of the authority are to:

Properly asses and collect taxes and duties at the right time without causing undue

burden to the public Encourage the public to present themselves and pay tax voluntarily Ensure that all monies collected are properly accounted for and timely banked Enforce all relevant statutory provisions Give advice to the minister on aspects of tax policy Facilitate international trade

1.8.1 ZRA’s organisation Structure

The Commissioner General is the chief Executive of the Zambia Revenue Authority. He or

she is responsible for three executive support units namely, Economic and Policy, public

Relations and Tax Payer education. The Commissioner General is assisted by three

commissioners who head the Domestic taxes division, Customs Services and Corporate

services division. The commissioner General has the following powers;

Request for a return to be submitted at any time Request accounts and documents to be submitted for examination Examine any person for purposes of obtaining information Search and seize money, documents and property

1.8.2 Domestic taxes Division.

This division is responsible for the administration of Income tax, property transfer tax and

mineral royalty tax, excise duty and domestic value added tax. With regards to VAT, the

division grants registration for VAT purposes to eligible traders so that they are able to

charge VAT on their taxable supplies and pay that VAT to ZRA. Whenever you will be

dealing with the above taxes, you will be expected to engage with this division.

1.8.3 The customs Services division

This is the division that has been set up to deal with customs duty and import VAT.


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1.8.4 ZRA Advice Centres

These provide taxpayers with information and services related to taxes. The centres also

attend to those who wish to register as tax payers.

1.9 Tax Avoidance and Tax Evasion

1.9.1 Tax evasion

Tax evasion is any action taken to evade (dodge) taxes by illegal means, for example;

(a) Suppressing information - failing to declare taxable income to the revenue authority

(ZRA) so that you do not pay the tax due.

(b) Providing false information - claiming expenses that have not occurred so that you

reduce the tax liability payable.

Tax evasion carries a risk of fines and/or imprisonment.

1.9.2 Tax avoidance

Any legal method of reducing your tax burden, by for example taking advantage of making

best use of available allowances, exemptions and reliefs. The term is also used to describe

tax schemes that utilise loopholes in the tax legislation. The revenue authority have

introduced disclosure obligations regarding tax avoidance schemes and anti-abuse rule has

been introduced to back up the existing specific legislation. The rule targets abusive

arrangements (action that cannot be regarded as reasonable) arising from tax arrangements

designed to achieve tax advantages such as decreasing a source of income or overstating a

deduction.

1.9.3 Professional and ethical guidance

Accountants often act for taxpayers in dealings with revenue authorities.

As an accountant, your duties and responsibilities should be towards both clients and

revenue authorities.

You must uphold standards of the accountancy profession as follows;

(a) to adopt an ethical approach to work, employers and clientsThe University of Zambia, Institute of Distance Education

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(b) Acknowledge the professional duty to society as a whole

(c) Maintain an objective outlook

(d) Provided professional high standards of service, conduct and performance at all times.

The accountants’ Code of Ethics and Conduct sets out five fundamental principles which

members including yourself should adhere to namely:

(i) Integrity

(ii) Objectivity

(iii) Professional competence and due care

(iv) Confidentiality

(v) Professional behaviour

1.10 Exercise

Attempt to answer the questions below to test your understanding on Unit 1 topic:

1. What are the qualities of a good tax system?

2. List the functions of taxation in the economy

3. What are the main types of taxes in Zambia?

4. Using appropriate examples, distinguish the various ways in which taxes may be

classified.

5. List the functions of the Zambia Revenue Authority

6. Identify the operating divisions of ZRA and briefly explain their functions

1.11Summary

This Unit introduced you to the working definitions of taxation as a way of raising revenue

for the government, the qualities of a good tax system, the role of taxation in a modern

economy, various categories of tax and the principle sources of tax law. In this unit you

have also been introduced to the concept of a charge year and the role of the Zambia

Revenue Authority in administering taxes in Zambia. With this firm foundation, you are

now ready to engage further in the practical aspects of taxation principles.


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UNIT 2

Income Tax and Taxation of Business Profits

2.1 Introduction

In the previous unit, we considered the tax system generally and made particular reference

to Zambia. In this unit, we will introduce you to income tax, which is tax from what

resident individuals like you make from their jobs, businesses, savings and other

investments. Our focus in this unit is income tax chargeable in Zambia on Zambian

resident persons. These persons include individuals, trusts and other bodies of persons. As

such, you are expected to use the applicable tax rates and allowance given in this module

for the charge year (tax year) 2016.

2.2 Objectives


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i) Explain the meaning of the terms ; residence, ordinary residence and domicile as

they relate to individuals and other persons other than individuals

ii) Describe the categories of taxable and exempt persons in broad terms

iii) Describe the categories of taxable and exempt income in general terms

iv) Define the term business in the context of taxation

v) Discuss and apply the badges of trade

vi) Explain the general rule to determine whether expenses are deductible or not

for tax purposes

vii) Compute capital allowances and business taxable profits and income tax

payable

2.3 The Scope of Income Tax

2.3.1 Definition of Income Tax

We will begin by defining what income tax is.

Definition: Income tax is a tax levied on the money that a person or business receives as

income and not on capital. We will come back to classification of income later in other

units.

2.3.2 Taxable Persons

This sub-unit will take you through the rules for determining whether someone is liable

for income tax or not.

Income tax is chargeable on the income of persons resident and ordinarily resident in

Zambia. The word person here refers to individuals and persons other than individuals,

such as companies operating in Zambia.

2.3.3 Residence


24

The term residence applies to both the taxable individuals and other taxable persons. The

Income Tax Act guides on how to establish the residence status in respect of individuals

and other persons other than individuals.

2.3.3.1 Individuals

An individual is resident in Zambia if that individual is physically present in Zambia for a

period of not less than 183 in a charge year.

2.3.3.2 Persons Other than Individuals

A person, other than an individual is resident in Zambia if any of the following criteria is

satisfied:

i) That person (company) is incorporated (formed) in Zambia, or

ii) The central management and control of the person’s ( i.e company’s) business

or affairs are exercised in Zambia.

A person other than an individual is managed centrally and controlled in Zambia if its

board of directors or other central management board for that company (person) meets in

Zambia for purposes of making decisions that affect that company.

2.3.4 Ordinary Residence

Individuals who live in Zambia are resident and ordinarily resident in Zambia.

People who come to Zambia with the intention to live in Zambia for a period of more than

twelve months, are deemed (taken) to be resident and ordinarily resident in Zambia from

the date of their arrival.

2.3.5 Domicile

Let us discuss the concept of domicile. You are said to be domiciled in the country that is

your permanent home. There are two types of domicile which you should be aware of

namely domicile of origin and domicile of choice.

2.3.5.1 Domicile of originThe University of Zambia, Institute of Distance Education

25

Domicile of origin is the domicile you acquired at birth. Meaning that you are domiciled as

an individual in the country in which you are born.

2.3.5.2 Domicile of Choice

Individuals can make a choice as to what country they want to be their permanent home

once they attain an age of sixteen year. This means that domicile of choice is one acquired

by choice.

Individuals who are domiciled in Zambia may be liable to Zambia income tax on their

worldwide income whether the foreign income is remitted to Zambia or not, unless the

income is specifically exempt from income tax. However, the tax system applicable in

Zambia is such that only income earned in Zambia is assessed for tax. As such income

whose source of earning is not Zambia may not be assessed for tax.

2.3.6 Exempt Persons

In this sub-unit, we explain to you who is exempt (excluded) from paying income tax.

Persons who are not resident in Zambia are exempt from Zambian income tax. However,

there are certain persons who are exempt from income tax although they are resident and

ordinarily resident in Zambia. Such exempt persons include:

The Republican President on income received or earned as president

Traditional Chiefs for income received from the government

Local authorities

Approved funds

Commonwealth development Corporation

Club, Society or association organized and operated only for social welfare or

recreation and improvement etc. provided its income may not in anyway be

received by a member or shareholder.

Political parties registered as a statutory society under the Societies Act

Registered Trade unions

Other persons listed in Part III of the second schedule of the Income Tax Act


26

2.3.7 Taxable and Exempt Income

You should remember that Income that is liable to income tax is that which arises from a

source within Zambia or deemed to be within Zambia.

2.3.7.1 Taxable Income

The following categories of income are taxable:

Emoluments from employment or holding an office

Profits or gains derived from a business

Interest from banks and building societies

Rental income from property leases in Zambia

Dividends

Royalties

Loan and debenture interest

Income received by way of annuities

Commission

2.3.7.2 Exempt Income

This is income that is not subject to tax. It is not all income that is taxable even when it is

received by a taxable person. Certain classes of income are specifically exempt by statute.

Examples of income that are exempt from tax include:

Emoluments of the Republican President which are as a result of holding that office

Emoluments of chiefs including the Litunga

Bursaries or scholarships payments for education and maintenance during

education

War disability pensions

Income received in conjunction with the award of military, police, fire brigade or as

an old age pension paid out of public funds, or as a benefit paid under any written

law in respect of injury or disease suffered in employment.

Income received by way of grant as compensation for loss of office or disturbance

by an officer admitted to the permanent and pensionable establishment of the

government.


27

2.3.8 Reflection

In your own word, explain the meaning of the phrase ‘income is liable to tax in Zambia if

it is from a source within Zambia or from a source deemed to be within Zambia’.

We want to imagine that within your explanation was something similar to this;

The phrase means that income of Zambian resident persons is liable to Zambian income

tax unless it can be proved that income is not derived from sources linked to Zambia.

We hope you will have a clearer understanding of this and other concepts so far discussed

in this unit as we get to the end of this module.

2.4 Taxation of Business Profits for Unincorporated Businesses

2.4.1 Reflection

Have you ever thought about the meaning of ‘Business’? well, whether you have ever

considered it or not, kindly posse a while, reflect and write down your definition of the

term business.

We want to suppose that within your definition, you might have thought of business as an

activity that may involve:

Trading

Manufacturing

Farming a profession or vocation for the purpose of making a profit or meeting a

certain objective.

As you can see from the above, the term business includes trade, professions and

vocations.

2.4.2 The badges of Trade

As a tax consultant, you should know that a trade is said to be in existence if the badges

(marks) of trade are present. In this part of the unit, we will describe to you the main

badges of trade. For you to conclude as to whether a trade exist or not, all of the badges of The University of Zambia, Institute of Distance Education

28

trade have to be considered and weighed. Some may show you that there is a trade while

others may show that there is no trade.

When you are involved in a series of transactions, you may rely on badges of trade to

determine whether those transactions constitute trading.

We will now discuss the main badges of trade below:

2.4.2.1 The Subject Matter of Realisation

You may already know that some assets are normally held as trading stock (inventory)

while others are not. If the asset sold is one normally held as trading stock the presumption

that a trade is being conducted is greater. If on the other hand you determine that an asset

that has been sold is one which is not normally a trading stock, it is unlikely that the

transaction will be interpreted as trading.

2.4.2.2 The length of the period of ownership

The general guidance has been provided that trading stock is not normally held for a long

period of time such as more than twelve months. Therefore, if you disposed of an asset that

you held for a long period of time, it will be quite difficult to determine whether the asset

had been held as trading stock. Assets held for long periods of time are normally

considered to be investments.

2.4.2.3 The frequency of similar transactions

Another criteria you may use to determine a trade is if the frequency (occurrence) of

similar transactions. If the frequency of transaction is high, the chances of classifying a

taxpayer as a trader is high. Where the frequency of similar transaction is low, the chances

of being classified as a trader are also low.


29

2.4.2.4 Supplementary work and marketing

If you acquired an asset in poor state and you carryout supplementary work to improve the

asset by making it more marketable, then this asset when sold will give rise to trading

profit.

2.4.2.5 Circumstances giving rise to realisation

You should remember that an asset which has been sold will not always give rise to taxable

profit. You will always need to take the circumstances that led to the sale into account. If a

taxpayer disposes of an asset in order to raise money to solve a financial problem, it will

be difficult to establish whether an asset was trading stock.

2.4.2.6 The taxpayer’s intention

Your intention to trade clearly constitutes trading. However, your intention to make a profit

may not constitute trading. As such, it has to be established as to whether as taxpayer you

sold an asset with the intention to trade.

2.4.3 Accounting and Taxable Profits

As a tax consultant or agent you should know that income tax is only chargeable on the

profits if the turnover for the year is over K800,000. Also know that the ZRA will normally

accept profits which are determined in accordance with the accounting principles provided

that there is no conflict between accounting principles and tax legislation. However, there

is normally a conflict and the accounting profit require several adjustments to be made on

it in order to determine the taxable profits.

Some Expenses that are charged in the Accounts are not recognized as expenses for tax

purposes. We have so far recognized such expenses as non-deductible expenses as per

requirements of tax legislation or because they do not meet the general criteria for


30

allowing them as expenses for tax purposes. Similarly some Income that is usually credited

to the profits is not taxed under Tax rules.

You are expected to determine the taxable profits as follows:

2.4.4 Computation of taxable business profits

K’000 K’000

Net profit as per statement of comprehensive income xxxxx

Add:

Expenses charged in the accounts but not deductible for tax purposes xxxxx

Taxable income not credited to accounts xxxxx

xxxxx

Less:

Income credited to accounts but not taxable xxxxx

Expenses for allowable for tax purposes not deducted in accounts xxxxx

(xxxxx)

Taxable business profits xxxxxx

2.4.5 Rules for determining deductible expenses when computing taxable profits

Accountants are guided by the accruals concept while the taxman is guided by the

principle that expenses and Incomes have to be considered in light of tax legislation.

Only expenses that are incurred wholly and exclusively for the purposes of trade, vocation

or profession are deductible in the tax computation. This means that before computing the

tax payable or refundable, the taxpayer’s adjusted profit needs to be computed first.


31

In order for an expense to be allowed for the purposes of computing taxable profits you

should ensure:

It must be revenue and not capital, and

It must be incurred wholly and exclusively for the purposes of the business.

2.4.5.1 Capital Expenditure

This is specifically disallowed. You should remember that all expenditure incurred

on the improvement of non-current assets cannot be deducted in the tax

computation.

Depreciation of non-current assets, losses on disposal of non-current assets are both

non-deductible.

Profits on disposals of non-current assets are not taxable.

A lump sum payment for the surrender of a lease is capital expenditure.

2.4.5.2 Repairs

Definition

Repair is restoration by renewal or replacement of subsidiary parts of the whole.

You are expected to apply the following principles on repair of assets.

An asset which requires substantial expenditure to be incurred on it before it can be

used in the trade basically calls for capital expenditure and hence non-deductible.

On the other hand, expenditure incurred on recently acquired assets to remedy (fix)

normal wear and tear is revenue and allowable for tax purposes.

2.4.5.3 Appropriation of profits


32

You should take note that appropriation of profits such as wages and salaries of owners of

a trade, profession, interest on capital, transfers to reserves are not allowable expenses for

tax purposes.

2.4.5.4 Drawings

If your client who is a trader withdraws goods for personal use, he or she should be

charged at the market value of the goods. As such if the goods have been recorded

in the profit and loss as Sales at Cost then the profit should be added when

computing taxable profits.

If the goods have not been recorded even at cost then the amount to be added to the

accounting profit is the market value of the goods.

2.4.5.5 Bad debts

You are expected to apply the following rules to bad debt expenses when computing

taxable profit:

Trade debts written off are allowable. Debts previously written off but now

recovered are taxable

Specific provisions for bad debts are allowable, i.e. an increase is deductible and a

decrease is taxable.

Non - trade debts such as loans are not allowable. Loans written off should be

added back, and loans previously written off but now recovered should be

deducted. However, if the business is that of providing loans then the loans written

off are allowable.

General provisions for bad debts are not allowable.

2.4.5.6 Defalcations

You treat losses suffered by a business due to the dishonesty of the proprietor or a director

as not allowable. Losses caused by a subordinate who has no control are allowable.


33

2.4.5.7 Payments to Family Members

How should you treat payments to family members?

Wages and salaries paid to family members will be disallowed if they are unreasonable.

You may have to consider wages and salaries of non-family members of the trader to

determine whether the payments to members of the family were reasonable.

2.4.5.8 Legal and Professional Fees

You treat legal and professional charges relating to capital or non-trading items as not

deductible. These include charges incurred in acquiring new capital assets or legal rights,

issuing of shares, drawing up partnership agreements and litigating disputes over the terms

of a partnership agreement.

Legal and professional charges incurred are deductible when they directly related to

trading activities. Deductible items under this category include but are not limited to the

following:

Legal and professional charges incurred defending the taxpayer’s title to a fixed

asset;.

Charges connected with an action for breach of contract.

Expenses of renewal (not the original grant) of a lease for less than 50 years.

Charges for trade debt collection.

Normal charges for preparing accounts and assisting with tax computation. You

must however take note that additional accountancy costs arising as a result of a tax

investigation revealing discrepancies are not allowed.


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2.4.5.9 Gifts and Entertainment

Here is the rule you should apply:

a). Expenditure incurred on entertaining suppliers, customers, etc. is not allowable

b). Expenditure incurred on entertaining employees is allowable.

Allow cost of a gift if:

a). It bears a prominent advertisement for the donor.

b). The value is not significant. The value of such a gift per individual should not exceed

K100 in a charge year. The cost of gifts in excess of K100 to the same person is

disallowable.

The cost of trade Samples that are mainly for advertisement is allowable.

If the business being conducted is that of providing entertainment or hospitality, then the

expenses are allowable.

2.4.5.10 Travel Expenses

Your business travel expenses are allowable.

On the other hand, expenses incurred in travelling between home and the place of trade is

not allowable unless you can prove that your home is also your place of trade.

2.4.5.11 Donations to approved Charities


35

What conditions are necessary for amounts paid for charitable, ecclesiastical, research or

educational establishment or national amateur sporting purposes to be considered

allowable?

We hope your answer included the following:

The Donation should be in money or money’s worth

The donation should be made for no consideration whatsoever

The institution should be approved by the Minister of Finance

2.4.5.12 Training Expenditure

You allow expenditure on technical education relating to the particular business and

relevant for obtaining further experience. If the person making the payment is related by

blood or by marriage to the person receiving the training, the expenditure may not be

allowable.

2.4.5.13 Subscriptions

A deduction is allowed in ascertaining the gains or profits of a business or the emoluments

of any employment or office for any subscription paid by a person in respect of his

membership of a trade, technical or professional association that is related to his business,

employment or office.

Subscriptions to associations or clubs not associated with the purpose of the trade are

disallowed, e.g. Golf club subscriptions.

2.4.5.14 Research Expenditure

You should treat research expenditure as allowed provided it is incurred in that charge year

and it is not capital expenditure in nature.


36

Donations to an approved Society/ educational establishment are allowable provided the

donated money is used for the purpose of Industrial Research work related to the business,

or trade.

2.4.5.15 Insurance Claims

For insurance claims, the criteria you should apply is as follows:

a). Claims relating to any loss on current assets are taxable.

b). Claims relating to damages / loss of fixed assets are not taxable as trading receipts.

2.4.5.16 Pensions and benefits

As long as they are reasonable, remuneration given to employees together with

contribution to approved pension funds, you should treat them as allowable.

2.4.5.17 Fines

Generally treat fines as non allowable expenses for tax purposes.

2.4.5.18 Pre-trading expenditure

You only allow expenditure incurred within a period of eighteen months prior to starting

commencement of the business for the type of expenses allowable had the business been in

trading. Examples of expenses that you would allow are rent for business premises paid in

advance before commencement of business.

2.4.5.19 Trading Losses

The losses we are referring to are trading losses as adjusted for taxation purposes after

capital allowances. These losses are trading losses carried forward and relived against

profits of the same trade arising in the following five years only.

2.4.6 Income


37

Income that is taxed at source through the withholding tax system is not taxable as trading

receipts. Examples include rental income, interest income, royalties, dividends and so on.

Trade discounts received are taxable as trading receipts. Profits on disposal of non-current

assets are not taxable income and you should deduct them in arriving at the final taxable

profits.

2.4.7 Computing Income Tax on Taxable business profits

Let us look at an example for the computation of taxable business profits and income tax

Illustration

Question

Mr. Mubiana has been trading as a grocery retailer in Mongu for many years. Mr. Mubiana

accommodates his family on the first floor of his trading building above the shop. For the

year ended 31 December 2016, his Statement of Comprehensive income showed the

following:

K K

Revenue 400,820

Less cost of Sales 98,250

Gross Profit 302,570

Income:

Profit on sale of property 20,215

Profit on sale of investments 9,525

Bank Interest received 2,130 31,870

334,440

Expenses

Staff wages 72,000

Daughter’s wages 5,620

Rent and rates 13,370

Electricity 14,500The University of Zambia, Institute of Distance Education

38

Advertising 28,000

Telephone 24,600

Motor vehicle expenses 34,800

Loan interest 6,000

Repairs and renewals 9,810

Depreciation on motor vehicle 7,400

Miscellaneous expenses 3,500

Postage and stationery 10,320

Bad debts 2,100 232,020

Net profit 102,420

The following information is also available:

1. It is agreed with the Zambia Revenue Authority that one fifth of expenditure on

electricity, rent and rates is applicable to the living accommodation.

2. Two sixth of the motor vehicle expenses relates to private use

3. The profit on the sale of investment relates to sale of ordinary shares holding in

Zambeef Zambia Plc. Mubiana acquired these shares on 2 February 2016 for

K39,600 and sold them to Mr. Hakulipa on 31 July 2016 for K49,125.

4. Mr. Mubiana is paid a nominal annual salary of K6,000 and this amount is included

in staff wages. Mubiana’s daughter worked as a full time employee in the business.

5. An estimate of good worthy K4,100 was withdrawn from inventory for Mubiana’s

and his family use.

6. Repairs and renewals included:

K

Painting the inside of the shop 3,350

Repair of shelves 1,050

Constructing extension of store room 5,410

9,810

7. Miscellaneous expenses comprise:

Legal expenses on debt collection 130The University of Zambia, Institute of Distance Education

39

Christmas gifts – bottles of gin and whisky 600

Donation to local charity 120

Subscriptions to chamber of commerce 200

Payment to employee in lieu of notice 250

Entertaining customers 800

Sundry allowable expenses 1,400

3,500

8. Bad debts account

K K

Bad debts written off 1,050 Balance b/f

Balance c/f General reserve 2,100

General reserve 4,100 Specific reserve 3,400

Specific reserve 3,850 Bad debts recovered 1,400

Profit and loss 2,100

9,000 9,000

Required

Compute Mubiana’s income tax payable on the tax adjusted profits for the year ended 31

December 2016, giving reasons for any adjustments you make.

Answer

Mubiana

Computation of Tax Adjusted Business Profit for the Year ended 31 December 2016

Note K K

Net profit as per accounts 102,420

Add:

Rent and Rates (1/5 x 13,370) 1 2,674

Electricity (1/5 x 14,500) 1 2,900The University of Zambia, Institute of Distance Education

40

Motor vehicle expenses (2/6 x 34,800) 1 11,600

Mubiana’s salary 2 6,000

Goods for personal use(24.51% x 4,100) 3 1,005

Building extension-store room 4 5,410

Christmas gifts 5 600

Entertaining customers 5 800

Increase in provision for general bad debts 6 2,000

Depreciation of motor vehicle 7 7,400

35,520

137,940

Less:

Profit on sale of property 8 20,215

Profit on sale of investment 8 9,525

Bank interest received 9 2,130 (31,870)

Taxable business profits 106,070

Less income at 0% tax (36,000)

70,070

Income tax

25% x K 9,600 2,400

30% x K25,200 7,560

35% x K35,270 12,345

Income Tax payable 22,305

Notes

1 These are not all for business purposes. The portion for private expenses are

treated

as appropriation of profits and so are not allowed.

2 This is capital expenditure and is not allowed.

3 Goods taken for private use are charged at full market price and not allowed.

4 It is an appropriation of profit hence not allowed.

5 These do not bear prominent advertisement for the donor and are not allowed.

6 Increase in general bad debt provision not allowedThe University of Zambia, Institute of Distance Education

41

7 Depreciation is not allowed.

8 Profits on disposal of non-current assets are not taxable.

9 Bank interest is taxed at source under withholding tax which is final income tax

2.4.8 Reflection

1. Explain how you would treat the following when computing business tax

(a) Interest on a hire purchase agreement for purchase of plant and machinery.

(b) Fine for dangerous driving while delivering goods to business warehouse

(c) Rent Income received

(d) Increase in specific provision for bad debts

(e) Legal fees for criminal trespass by business proprietor

(f) Loss due to pilferage by proprietor

(g) Interest paid on overdraft facility for business

2. Define a business for tax purposes and give main categories of businesses.

3. Outline the badges of trade.

4. Kabisa made a trading profit of K130,000, received bank interest of

K32,000 and dividend income of 32,200 in 2016. Calculate Kabisa’s

income tax payable for 2016 charge year.

We want to imagine that your solutions are as those given below. If you are not too sure

please go back to the notes until you understand the relevant principles.

1 (a) Allowable

(b) Not allowable

(c) Not Taxable

(d) Allowable

(e) Not allowable

(f) Not allowable

(g) Allowable

2. May be define as any profession, vocation or trade and the main categories include:


42

(a) Any adventure or concern in the nature of trade whether singular or otherwise.

(b) Manufacturing and

(c) Farming

3. (a) The subject matter of realization

(b) The length of the period of ownership

(c) The frequency of similar transactions

(d) Supplementary work and marketing

(e) The circumstances giving rise to realization

(f) The taxpayer’s intention

4. Kabisa’s Income Tax Payable for the year ended 31 December 2016

K

Trading profit 130,000

Less income at 0% tax (36,000)

94,000

Income tax:

25% x K9,600 2,400

30% x K25,200 7,560

35% x K59,200 20,720

Income tax payable 30,680

2.5 Capital Allowances

2.5.1 Scope of capital allowances

What are capital allowances? It is a tax relief given on certain types of capital

expenditure. Capital Allowances replace the disallowed depreciation charge in theThe University of Zambia, Institute of Distance Education

43

adjustment of profits, giving tax relief against trading profits in respect of expenditure

incurred on qualifying plant and machinery.

The following are qualifying types of capital expenditure upon which you may claim

capital allowances;

Implements, plant and machinery

Industrial buildings and

Commercial buildings

You should take note that capital allowances are only available on qualifying capital

expenditure incurred exclusively for business purposes.

2.5.2 Capital Allowances on Implements, Plant and Machinery

Our starting point is the consideration of the meaning of implements, plant and

machinery. The words must be given their ordinary meaning. We may define the phrase

Implements, Machinery and Plant to be all moveable and fixed items of equipment.

Plant is generally defined as assets that perform an active function in the business –

something with which the trade is carried on and will include office furniture and

equipment including moveable office partitioning. Machinery will include motor

vehicles and computers, including building alterations necessary for the installation of

plant and machinery.

You must observe two tests to determine whether an object qualifies as Plant or not. These

are:

The function or business use test: Does the object fulfil the function of plant in the

business? If so, it can qualify for capital allowances even if it is a building or

structure.


44

The premises test: Is the object part of the premises? If so, capital allowances are

not due, no matter what the function is unless the premises themselves are plant.

2.5.2.1 The allowances available

As a tax consultant, you should be aware that capital allowances on implements, plant and

machinery are available in the form of tear and wear allowances. You should however

remember that the wear and tear allowances are based on the cost of qualifying

expenditure. Here are the rates at which you can claim wear and tear allowances:

(a) For implements, plant and machinery including commercial vehicles use 25% of

cost.

(b) For implements, plant and machinery used in manufacturing, electricity power

generation, farming and leasing use 50%

(c) Non-commercial vehicle qualify at 20% of cost

You are expected to know the difference between commercial vehicles and non-

commercial vehicles. Commercial vehicles include vans, buses, pickup trucks, lorries and

others of similar type. All other vehicles are non-commercial and include salon cars,

station wagons and so on.

Further, you are to claim full wear and tear allowances on all implements, plant and

machinery in the year of purchase. However, you will not claim wear and tear allowances

in the year of disposal of implements, plant and machinery.

2.5.2.2 Qualifying periods


45

In unit 1 (one), we introduced you to the concept of charge year. Each item of qualifying

expenditure qualifies for capital allowances individually. These capital allowances are

available for charge years.

Illustration

Musonda Bwembya prepares accounts to 31 December. All his assets are wholly and

exclusively for business. Musonda’s business does not include manufacturing. The

following transactions occurred since commencement of business:

1 January 2014 Purchased a Scania Truck K700,000

22 July 2014 Purchased Equipment K 45,000

13 November 2014 Purchased Toyota Hilux K530,000

1 February 2015 Bought Furniture K 32,000

Calculate Musonda Bwembya’s capital allowances for the 2015 and 2016

Answer

Musonda Bwembya

Computation of Capital Allowance on Implements, Plant and Machinery

Values Capital Allowances

Year to 31 December 2015

K’000 K’000

Scania Truck

Cost 700

Wear and tear allowance (25% x K700,000) (175) 175

Income tax value (written down value) c/f 525

Equipment

Cost 45

Wear and tear allowance (25% x K45,000) (11.25) 11.25The University of Zambia, Institute of Distance Education

46

Income tax value (written down value) c/f 33.75

Toyota Hilux

Cost 530



Total Capital Allowances for 2015 292.25



K’000 K’000

Scania Truck

Income tax value (WDV) b/f 525


Income tax value c/f 350

Equipment

Income tax value (WDV) b/f 33.75

Wear and tear allowance (25% x K45,000) (11.25) 11.25

Income tax value c/f 22.50

Toyota Hilux

Income tax value (WDV) b/f 424


Income tax value c/f 318


47

Furniture

Cost 32



Total Capital Allowances for 2016 300.25

2.5.2.3 Divided Use

In cases where the qualifying asset has an element of private use by the proprietor, then the

claim of capital allowances you can make will be restricted to the proportion of business

use for that asset. This means that you will compute and deduct the wear and tear

allowance in full and claim only the proportion of business use.

Example

Mwale has been in business for many years. He owns a Mazda car which he acquired at a

cost of K210,000 on 1 January 2016. It has been established that the car has both private

and business use. It has been agreed with Zambia Revenue Authority that the proportion of

private use for this car should be estimated to be 30%.

Required

Calculate the capital allowances claimable by Mwale for the year ended 31 December

2016.

Answer

Mwale

Computation of Capital Allowance on Implements, Plant and Machinery


48



K’000 K’000

Mazda car

Cost 210

Wear and tear allowance (20% x K210,000) ( 42) x 70% 29.40


2.5.2.4 Disposals of Implements, Plant and Machinery

Let us now consider the effect of disposals on capital allowances. If you have disposed of

some implements, plant and machinery, you should deduct the disposal proceed from the

written down (income tax) value brought forward in the year in which the disposal is

made. This may give you either a balancing allowance or a balancing charge. You cannot

claim wear and tear allowance in the year you dispose of an asset for any asset disposed of.

Where an asset has been disposed of in the same year it is acquired, you will not claim

wear and tear allowance. All you do is match the proceeds with the acquisition cost of that

particular asset.

2.5.2.5 Balancing allowance

Balancing allowance arises when the disposal proceeds of your disposed asset are less than

the income tax (written down) value that is matched with those proceeds.The University of Zambia, Institute of Distance Education

49

You should treat balancing allowances as capital allowances in the same way that wear and

tear are. You should add the balancing allowances to wear and tear and treat the total as the

capital allowances for the year. Where the asset sold had an element of private use by the

proprietor, you should then restrict the balancing allowance to the proportion of business

use of the asset.

2.5.2.6 Balancing Charge

Let us suppose that the disposal proceeds are more than the income tax value being

matched with the asset. The difference that arises is called a balancing charge or a capital

recovery. Balancing charges or capital recoveries reduce the capital allowances. In a case

where the net result is still a balancing charge, you should add that amount to profits to

arrive at the taxable business profits amount.

Where the asset sold had an element of private use by the proprietor, you should then

restrict the balancing charge to the proportion of business use of the asset.

Illustration

Question

Kalezhi Kakoma is involved in the selling and buying of hardware goods. During his

trading, he acquired a Mitsubishi motor car at a cost of K20,000. At 1 January 2016, the

written down value of the car was K16,400. Kakoma’s private use of this car has been

agreed with the Zambia Revenue Authority to be at 25%. Mr. Kalezhi Kakoma also owns a

truck with a written down value of K16,000 which he acquired at a cost of K32,000.

During the year to 2016, Kakoma purchased an Hp Compaq computer for K8,000 and sold

off his truck for K15,000. He also sold the Mitsubishi motor car at K22,000. Kakoma

replaced the truck and bought a Fuso truck for K90,000. He also replace the Mitsubishi


50

motor car with a Toyota motor car at a cost of K76,000. The private use of the Toyota car

will remain at 25%.

Required

Compute Kalezhi Kakoma’s capital allowances for the charge year 2016, clearly showing

the written down (income tax) values both at the start and end of the charge year.

Answer

Kalezhi Kakoma

Capital Allowances Computation for the Tax Year 2016

Value Capital allowances

K K

Mitsubishi Car

Written down value b/f 16,400

Disposal proceeds (limited to cost) 20,000

Balancing charge ( 3,600) x 75% (2,700)

Truck

Written down value b/f 16,000

Disposal proceeds (15,000)

Balancing allowance 1,000 1,000

HP Compaq Computer

Cost 8,000

Wear and tear allowance (25% x K8,000) (2,000) 1,200

Written down value c/f 6,000


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Fuso Truck

Cost 90,000



Toyota Car

Cost 76,000



Total Capital allowances for the year 37,200

2.5.2.7 Hire Purchase and Leasing

You should be familiar with the types of lease available namely finance and operating

lease.

A Finance lease is one that transfers substantially all the rewards and risks of

ownership of the asset from the lessor to the lessee. Under Finance lease, title

(ownership) does not pass to the lessee.

An operating lease is a lease other than a finance lease. These are normally the

same as a hire purchase (i.e. purchase of an item through installments) .Under a

hire purchase contract, the buyer is leasing the goods and does not obtain

ownership until the full amount of the contract is paid.

Where you acquire an item of plant and machinery under a hire purchase agreement, then

capital allowances are available for you to claim on the cash cost of the item. You are

required to treat the asset as if you acquired it at the time the hire purchase was entered

into for cash. The hire purchase interest you pay is an allowance expense as a finance

charge.

If you acquire an asset under a finance lease, then you as lessee are entitled to claim the

capital allowances on it. Where you acquire an asset under an operating lease, it is the


52

legal owner of the asset who claims the capital allowances on it. You as lessee will only

deduct lease rentals as allowable expense from the business profits.

Illustration

Question 1

Chakwangasha who operates a business centre acquired a photocopier from Zed

Technologies Limited on 1 April 2016. The terms were that Chakwangasha should pay an

initial deposit of K2,500 and pay six monthly instalments of K1,500 each starting I May

2016. The cash price of the photocopier is K7,000. Four other photocopiers have been

acquired under an operating lease at an annual lease rental of K1,200 per copier. The cash

price of each of the four leased photocopiers is K6,000. Zed Technologies Limited has

agreed with Chakwangasha that the operating leases are renewable annually.

The tax adjusted profit before capital allowances, lease rentals and hire purchase interest

for the year to 31 December 2016 for Chakwangasha was K 57,800.

Required

Calculate Chakwangasha’s taxable profit for the tax year 2016.

Answer

Chakwangasha

Taxable Business Profit for the Tax Year 2016

Note K K

Tax adjusted profit 57,800

Less:The University of Zambia, Institute of Distance Education

53

Lease rentals (4 x K1,200) 1 4,800

Hire purchase interest 2

[K2,500 + (K1,200 x 6) – K7,000] 4,500

Capital Allowance on Photocopier 3

25% x K7,000 (cash price) 1,750

Total deductions (11,050)

Taxable business profits 46, 750

Note:

1 Since there are four (4) copiers on lease the rentals are calculated by multiplying

the annual lease rental charge by four.

3 All the hire purchase payments were made in 2016 and the hire purchase interest

become an allowable expense in the tax year 2016.

4 Wear and tear allowances are only available on cash price of the photocopier bought

on hire purchase and not those on operating lease.

Question 2

Muzoonde, a businessman bought a Machine for K6,500 from Ama Machines Limited on Hire

Purchase. The terms and conditions of the Hire Purchase included the following:

Muzoonde was to make a deposit of K2,500 and four annual Instalment Payments of K1,000 on 30

June each year.

The rate of interest chargeable is 10 % per annum.

Required

Compute capital allowances to be claimed by Muzoonde.


54

Answer

Muzoonde

Computation of Capital Allowance

K

Cost Price (Cash Price) 6,500

Wear and tear allowance ( 25% x K6,500) (1,625)

Written Down Value 4,875

Capital allowance claimed by Muzoonde is K1,625

Note:

Muzoonde has acquired a Machine. This falls within the applied definition of Implements,

Machinery or Plant for the purposes of computing Wear and Tear allowance.

The Capital Cost of the Machine on which the Wear and Tear Allowance can be given is the Cash

Price of K6,500.

2.5.3 Capital allowances on Industrial Buildings

Let us now consider the capital allowances available for expenditure on industrial

buildings. You should take note that capital allowances on industrial buildings may also be

referred to as industrial building allowance.

2.5.3.1 Qualifying buildings

The following is the criteria you should apply to determine which buildings qualify for

capital allowances as industrial building.


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2.5.3.1.1 Buildings Used for Industrial purposes

The definition of industrial building below should provide you with the first criteria.

An Industrial Building means a building or Structure in use for the purposes of any electricity, gas,

water, inland navigation, transport, hydraulic power, bridge or tunnel undertaking, or any like

undertaking of public utility, or is in use for the purposes of any trade which:

Is carried on in a Mill, factory etc.

Consists of the Manufacturing of Goods

Consists of the Storage of goods to be used in Manufacturing

Consists of the Storage of goods on Imports or for Export

Consists in the working of a mine or well for the extraction of natural deposits.

You should note that the statutory definition of Industrial building or structure in the Income Tax

Act concentrates on the business Activity rather than the premises as such. In general of course the

type of activity required is that of manufacturer, i.e., subjection of goods and materials to any

process coupled with some wholesale rather than retail selling.

2.5.3.1.2 Hotels

Let us now consider the guidance you should follow on hotels. All Hotels in existence prior

to 1 April 1966 and beyond are excluded from the definition of Industrial buildings. However,

extension to any Hotel, old or new, on or after 1 April 1966 qualifies to be classified as an

industrial building unless the old Hotel was made out of a Converted building.

Any building, which on first construction is a Hotel, or which is an extension made to a building

first constructed as a Hotel and is certified by a relevant Government Ministry as conforming to the

Standards of the Hotel Industry, qualifies as an industrial building for the purposes of the Income

Tax Act and you may claim capital allowances on them..

2.5.3.1.3 Low cost housing

For any housing unit to qualify as an industrial building, you should ensure that such a

building is used for the welfare of employees such as canteens, workplace nurseries or for


56

purpose of providing housing for your business at a cost that does not exceed a certain

prescribed amount. This type of a building is referred to as low cost housing.

Low cost housing acquired or constructed will qualify for Industrial Buildings Allowance (IBA) if

the cost does not exceed K20,000. The cost of any housing unit exceeding K20,000 will not qualify

for Industrial Buildings Allowance.

2.5.3.2 Non- Qualifying buildings

The following are excluded from being classified as industrial buildings:

Dwelling Houses

Retail Shops

Show Rooms

Offices

Buildings which are used for purposes of a retail trade, repair or servicing trade.

2.5.3.3 Qualifying Expenditure

The expenditure upon which you can claim capital allowances is actual expenditure

incurred in the construction of a building less any subsidy or grant received from public

funds towards the expenditure you incurred.

You should exclude the cost of land. The cost of land does not qualify as part of the cost of

the building. However, incidental expenditure such as expenditure incurred on digging

foundations, preparing the land and architect fees may qualify as part of the cost of the

building.

Where part of a building is an industrial building and a part is not, then the whole building shall be

classified as an industrial building where the non-industrial part of the building does not exceed 10

% of the total cost. Thus if an office or showroom is housed in a factory building and costs 10 % of

the entire cost of the building, then the whole building would qualify as an industrial building.

Illustration

Question 1


57

Mweemba, a former Finance Director at Konkola Mines decided to resign and set up his own

business in 2014. He proceeded to acquire bare Land in Lusaka’s Kabangwe area at a cost of

K170,000 and proceeded with the Construction of a cooking oil manufacturing factory. The

construction completed and brought into use on 1 November 2016 at a cost of K650,000. Included

in the K650,000 were Architects fees of K32,000 and K7,000 paid in connection with the Land

Purchase.

Required

Show how the qualifying cost for industrial building allowance will be arrived at.

Answer

Expenditure must be incurred in construction, thus the cost of the Land and the incidental costs

associated with its acquisition do not rank for industrial buildings allowances. However, costs of

work on the Land that is preliminary to construction do qualify. Such costs include: The

preparation of the site in order to lay foundations, and cutting, tunneling and leveling the Land in

connection with the construction.

Professional fees – Architects Fees, incurred as part of a construction project do qualify for

industrial building allowances.

The Qualifying cost for industrial building allowances will therefore be computed as follows:

K K

Total Cost 650,000

Less:

Cost of land 170,000

Costs connected to land purchase 7,000

(177,000)

Qualifying cost 473,000

Question 2

Chileshe constructed a building whose cost was as follows:


58

K

Land 120,000

Main factory 712,000

Showroom 300,000

Staff canteen 218,000

Total cost 1,350,000

Required

Calculate the cost qualifying for Industrial Buildings Allowances.

Answer

K


Less cost of land ( 120,000)

Total construction cost 1,230,000

Less cost of showroom ( 300,000)


The cost of land does not qualify. Cost of showroom is excluded because it is more than

10% of qualifying cost.

Question 3

Banda operates a manufacturing business and constructed a factory in 2016. The cost of

the factory included the following:

KThe University of Zambia, Institute of Distance Education

59

Land 60,000

Architect fees 55,000

Preparing the building site 40,000

Digging foundations 25,000

Factory building 725,000

Total cost of factory 905,000

Answer

K

Total cost of factory 905,000

Less cost of land (60,000)


Note that only the construction costs and costs incidental to construction are qualifying

cost for Industrial Building Allowances. The cost of land does not qualify and is excluded.

Question 4

Munalula a proprietor of a small business constructed a building at a total cost of

K2,350,000.The cost is made up of the following:

K

Land 250,000

Engineering drawings 500,000

General administrative office 200,000

Staff canteen 300,000

Factory 1,100,000



60

Answer

K


Less cost of land ( 250,000)

Qualifying cost 2,100,000

The cost of general administrative office is treated as part of industrial building since its

cost is less that 10% of qualifying cost (i.e. it is less than K2,100 which is 10% of

K2,100,000)

2.5.3.4 Allowances Available

There are three types of allowances available on qualifying expenditure on industrial

buildings which you should be aware of namely:

The initial allowance

The investment allowance

The wear and tear allowances

2.5.3.4.1 The Initial Allowance

An initial allowance of 10% on an Industrial building is available on qualifying expenditure.

This allowance is only available on brand new buildings in the year when it is first put to use. No

initial allowance is given on an Industrial building which has been in existence for sometime and

which the taxpayer has subsequently bought.

2.5.3.4.2 Investment Allowance

This allowance is also only available in the first year at the rate of 10% of the qualifying

expenditure. It is given against the profits of the first year. You should not deduct

investment allowance in arriving at written down (Income tax) value at the end of the year.

Only newly constructed building qualify for investment allowance.


61

2.5.3.4.3 Wear and Tear Available

This allowance is available from the first year to the year immediately before that in which

the building is disposed of at the rate of 5% on qualifying expenditure.

Where a building is used for qualifying purposes part of the year and also for non-

qualifying purposes for the other part of the year, then you should treat that building as

having been used for the qualifying purposes throughout the year.

When you are claiming the available allowance, you should treat each building on an

individual basis.

Let us now look at an example.

Illustration

Question

Peter Mwansa constructed a new building at a cost of K900,000 which include the land

costing K 110,000 at the start of 2016. The building qualifies as an industrial building for

income tax purposes.

During the year Mwansa recorded a tax adjusted business profit before capital allowances

of K305,000

Required

Compute the capital allowances available to Mwansa and the final amount of taxable

business profit for the year 2016.

Answer

The qualifying cost of the building is:

K

Total cost 900,000The University of Zambia, Institute of Distance Education

62

Less cost of land (110,000)


Peter Mwansa

Computation of Industrial Building Allowances for 2016

Value Industrial Building Allowance

K K



Initial Allowance (10% x K790,000) (79,000) 79,000

Investment allowance (10% x K790,000) 79,000


Total Capital allowances 197,500

Peter Mwansa

Computation of Final Taxable Business Profits for the Year 2016

K

Tax adjusted business profits 305,000

Less capital allowances (197,500)

Final Taxable business profits 107,500

2.5.3.4.4 Low Cost Housing

Low cost housing qualifies for wear and tear allowances at 10%. Initial allowances and

investment allowances are available at 10% of cost in the first year only on the newly

constructed low cost housing.


63

2.5.3.5 Disposal of Industrial Buildings

In an event where you are dealing with disposal of Industrial buildings, you should match

the disposal value with the written down value at the start of the tax year in which the

disposal takes place. The result will either be a balancing allowance or a balancing charge.

The wear and tear allowance is not available in the year of disposal.

The buyer of a used building gets wear and tear allowance. Initial and investment

allowances are not available on used buildings.

2.5.4 Capital allowances on Commercial Buildings

A commercial building is a building which is not an industrial building or a farm

improvement or farm works and which is in use for the purposes of any business, provided

it was constructed on or after 1 April 1969. Examples may include warehouses used in

retail or wholesale trade, showrooms, sales offices, administrative offices and retail shops.

Commercial buildings qualify for wear and tear at the rate of 2% of qualifying cost. The

cost of land does not qualify.

2.5.4.1 Disposal of Commercial Buildings

You should treat the disposal of commercial buildings and the balancing allowance or

charge calculated in the same way as for any other building or plant.

2.6 Exercise

Attempt to answer the questions below to test your understanding on Unit 2 topic:

1. List the classifications of taxable and exempt income.

2. What is the general rule applied to determine whether an expenditure is allowable

for taxation purposes.

3. Explain the treatment of income taxed under withholding tax system when

computing taxable business profits.


64

4. Define industrial buildings.

5. State the types of allowances available on industrial buildings.

6. Kalaba Nyambe a renowned businessman in Kalabo made a net profit of K 467,250

for the year ended 31 December 2016. The net profit was arrived at after

accounting for the following items:

(a) Bank interest income received of K15,200

(b) Profit on sale of investment amounting to K27,800

(c) Depreciation of non- current asset of 38,000. The non-current assets were

exclusively used for business.

(d) Staff salaries of wages for K107,000

(e) A penalty for late filling in of income tax return amounting to K28,000

(f) Christmas party expenses for staff K20,000

(g) Fine for exceeding speed limit while driving to see customer

(h) Increase in specific bad debts provision of K17,000 and increase in general

provision for bad debts of 49,000

(i) Legal fees in relation to collection of trade debt of K25,000

Further information:

On 1 January 2016 Kalaba Nyambe bought a Toyota Camry with a cost of K53,000

and a Photocopier machine with at a cost of K20,000. 30% of the Toyota Camry is for

private use by Kalaba Nyambe.

On 1 June 2016 Mr. Nyambe completed constructing a shop which was brought into

immediate use on the same day. The total cost of the shop is K209, 000 and include the

cost of land at K30,000 while the rest of the cost is for actual construction.

You are required to calculate the tax payable by Kalaba Nyambe for the year ended 31

December 2016.

2.7 Summary


65

In this Unit you have been introduced to computation of taxable business for a trader and

the income tax payable. We further explained to you the taxable and exempt persons

including the concept of residence. The principles of tax adjusted profits were also

discussed and criteria for determining allowable expenses and income for taxation

purposes explained. You should appreciate the concept of badges of trade that were

explained to you earlier. We therefore expect you to be able to apply yourself in computing

income tax as the available capital allowances to a trade on qualifying non-current assets.

In case you are not sure of any part of this unit, please go back and work through the unit

again until you are confident that you understand.


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UNIT 3

Taxation of Partnerships and Income from Self-Employment

3.1 Introduction

In the previous unit, you learnt how to calculate taxable trading profits and income tax

payable after claiming available capital allowances. In this unit, you will learn how the

income tax rules for traders are adapted to deal with business partnerships. Thereafter, we

will introduce you to the taxation of income from self-employment under the presumptive

taxes approach. You are expected to use the applicable tax rates and allowance given in

this module for the charge year (tax year) 2016.

3.2 Objectives


i) Explain the meaning of the term partnership

ii) Describe how the taxable profits of a partnership are taxed

iii) Allocate the partnership profits or losses among partners according to their

partnership agreement including in instances where there is a change of

Partnership agreement.

iv) Identify persons who are liable to turnover tax

v) Calculate turnover tax and explain the procedure for its payment

vi) Explain the procedure for making presumptive tax assessment for passenger

transport business and how to calculate presumptive tax payable


67

3.3 Partnership Business

As you may already know from previous studies, a partnership business exist where two or

more people agree to trade together as partners. They also agree among themselves how

they will run the business and how they will share profits and losses from the business.

For purposes of tax, you should assume that partnership is not a person and hence not

chargeable to tax because the tax is charged only on persons according to the provisions

of the Income Tax Act. While the partnership is not taxed as a business, the partners

who form a partnership are taxable as individuals. In other words, each individual

partner is taxed like a sole trader who runs a business which:

Starts when he joins the partnership

Finishes when he leaves the partnership

Has the same periods of accounts as the partnership (except that a partner who

joins or leaves during a period will have a period which starts or ends part way

through the partnership’s period)

Makes profits or losses equal to the partner’s share of partnership’s profits or

losses.

3.3.1 Joint Return

Persons carrying on any business in partnership are required to furnish a joint return

of the Income of the partnership for a charge year declaring the names and addresses


68

of all Partners and their share of profits to which each partner is entitled for that

particular charge year.

In practice, the profits of the partnership are computed in the normal way and then

distributed among the existing partners who are liable to the normal income tax

computation rules.

3.3.2 Insurance issues

Sometimes a partnership undertakes an insurance policy to take care of the partner’s

beneficiaries after death. This is aimed at having ready funds for distribution to the

deceased’s capital account.

If the Insurance policy taken out is on joint lives of the partners, and all the

relevant charges and premiums on the policy are expensed in the partnership

profit and loss account, the amount of such premiums is not an allowable

expense in the partnership books but each partner is entitled to claim the

insurance rebate in respect of his share of the premiums.

If the Insurance policy is taken out individually by each partner, and the

premiums on the partner’s separate policies are borne by the partnership, the

premiums are in this case allowed as a deduction in the partnership books and

disallowed on each partner.

3.3.3 Computation of Partnership Taxable profits

The principles for the computation of taxes for sole traders that you learnt in unit 2 (two)

are applicable in the same manner to partnerships. You will be expected to use the same

rules for adjustment of profits. If a partner incurs an expense that is partly for purposes of

the business and partly for private purposes, you should only allow the business proportion

of that expense for tax purposes.


69

In order to arrive at the final taxable business profit of a partnership, you should deduct

capital allowances on all partnership assets that qualify from the tax adjusted business

profit. You should apply the rules for computing these capital allowances in the same way

those for sole traders are done. In cases where the individual partners use their personal or

private assets for the partnership business, then you will have to account for these capital

allowances on the individual partners’ shares of the partnership profits.

3.3.4 Appropriation of Profits and Losses

The profits of the partnership should be shared or divided among the partners on the basis

of the partnership agreement in existence in the accounting period.

You will generally be expected to treat partnership salaries and interest on capital accounts

for partners as partners’ appropriations.

Illustration

Question

Kalunga, Mwendapole and Lungu are Partners in a business, which commenced on 1

January 2015. They share profits and losses in the ratio 2:2:1. The partnership profit and

loss Account for the charge year ended 31 December 2016 is as follows:

Note K K

Turnover 450,000

Cost of Sales (210,000)

240,000

Rental Income 50,000

290,000

Less: Expenses:

Depreciation 100,000

Stationary and Printing 9,000

Repairs 1 5,000The University of Zambia, Institute of Distance Education

70

Subscriptions 2 6,000

Annuity 3 4,500

Insurance 4 6,000

Removal expenses 5 4,445

Legal Fees 6 12,000

Interest on loan 7 10,000

Cleaning 1,000

Unrealized Exchange Loss 50,000

Rent and Rates 2,500

Tax Penalty 12,000

Tax appeal costs 5,000

Accounting Fees 8,000

Salaries and Wages 8 75,000

(310,445)

Net Loss (20,445)

NOTES:

1) Repairs: These are revenue in nature.

2) Subscriptions: One third of these are club subscriptions at the Lusaka Golf Club.

The remainder relates to membership fees at ACCA and the Zambia Institute of

chartered Accountants (ZICA).

3) Annuity: The amount was paid to Zwangendaba, a former partner who retired four

years ago. The clause in the partnership agreement relating to payments made to

retired partners is still active and applicable to the current partners.

4) Insurance: The amount relates to insurance premiums on the Insurance policy taken

out on Joint lives of all the partners.

5) Removal Expenses: Kalunga has always lived outside Lusaka where the central

management of the partnership business is located. To enhance his contribution to

the business, it was decided that the business meets his relocation expenses in full,

from Kapiri Mposhi to Lusaka.

6) Legal Fees: These are made up of the following:

K


71

Legal Advice on acquiring fixed asset 4,000

Collecting trade debts 6,000

Defending title to Fixed Asset 2.000

12,000

7) Interest on Loan is made up of the following:

K

Trading Loan interest 5,000

Fixed Asset acquisition Loan 5,000

10,000

8) Salaries and Wages: This figure is made up of the following:

K

Kalunga 15,000

Mwendapole 15,000

Lungu 20,000

Other Employees 25,000

75,000

9) Assume Capital allowances of K25,000.

Required

Compute the Tax Liability of Each Partner.

Answer

Kalunga, Mwendapole and Lungu

Computation of Partnership Adjusted Profit for the year Ended 31 December 2016

K K

Loss as per accounts (20,445)


72

Add Non- deductible expenditure:

Depreciation 100,000

Subscription to Lusaka Golf club(1/3 x K6,000) 2,000

Annuity 4,500

Insurance 6,000

Removal expenses 4,445

Legal fees for acquisition of non-current asset 4,000

Interest on Loan: non-current acquisition 5,000

Unrealised exchange loss 50,000

Tax penalty 12,000

Tax appeal costs 5,000

Salaries for partners 50,000

242,945

222,500

Less: Capital allowances 25,000

Rental Income 50,000

(75,000)

Tax adjusted business profit 147,500

Kalunga, Mwendapole and Lungu

Division of Partnership Profits for the year Ended 31 December 2016

Total Kalunga Mwendapole Lungu

K K K K

Partnership Salaries 50,000 15,000 15,000 20,000

Share of profits 147,500 59,000 59,000 29,500

Partnership rentals 50,000 20,000 20,000 10,000

Insurance rebate (6,000) (2,400) (2,400) (1,200)

241,500 91,600 91,600 58,300

Less Income at 0% tax (36,000) (36,000) (36,000)

55,600 55,600 22,300The University of Zambia, Institute of Distance Education

73

Income tax

25% x K9,600 2,400 2,400 2,400

30% x K25,200 7,560 7,560

30% x K12,700 3,810

35% x K20,800 Balance 7,280 7,280

Income tax payable 17,240 17,240 6,210

You should take note of the following as you revise through the answer above;

i).First and foremost it is vital to realize that the income Tax Act does not recognise a

partnership as a distinct taxable person. For this reason, a partnership is not chargeable

to tax as such, but each partner is assessed separately.

ii).The Income Tax Act provides that persons carrying on any business in partnership

are required to make a joint return as partners in respect of such business.

iii).In practice, ZRA first determines the taxable income of the partnership on the basis

that it is a separate taxable person. Then the Income of that partnership is apportioned

among the partners according to their rights to share in the profits of the partnership.

iv).After apportionment, the partners are then individually assessed on their respective

share of the partnership Income after taking into account any income received from

Sources outside the partnership.

v).Repairs

Repairs, which are not on account of a capital nature, are allowable for tax purposes.

vi).Annuity

Annuity payments to a former partner are not allowable for tax purposes.

vii).InsuranceThe University of Zambia, Institute of Distance Education

74

Where the insurance policy taken out is on joint lives of the partners, and all the

relevant charges and premiums on the policy are expensed in the partnership profit and

loss account, the amount of such premiums is not an allowable expense in the

partnership books.

viii).Removal Expenses:

Removal expenses, which are of a private nature, are not allowable.

ix).Legal fees:

The cost of legal advice on acquiring a new fixed asset is not allowable.

x).Interest on Loan:

Interest on Loans used to acquire fixed assets is not an allowable deduction in the tax

computation.

xi).Salaries and Wages:

Only salaries for employees qualify.

3.3.5 Changes in Partnership Agreement

You should follow the following steps in computing the profits to be assed for each partner

when there is a change in the partnership agreement:

i. You should divide the accounting periods into two on the date the agreement is

made. You will therefore have a period before and after the change.

ii. Then you should allocate the total profit to each of the two periods on a time basis.

iii. Divide the profits allocated to each period between the partners on the basis of the

partnership agreement for each period.

Illustration

Question


75

Twaambo and Sinyangwe are in partnership as business consultants preparing accounts to

31 December each year. They agreed to the profit and loss sharing ratio of 3:2 with

Twaambo and Sinyangwe receiving an annual salary of K15,000 and K9,500 respectively.

On 1 August 2016, Sakayola joined them as a new partner resulting in the change of the

partnership agreement as follows:

Twaambo Sinyangwe Sakayola

Period from 1 August 2016

Annual Salary (K) 11,000 12,000 13,000

Profit or loss sharing ratio 5 3 2

The partnership had a taxable profit of K120,000 for the year ended 31 December 2016

Answer

Twaambo, Sinyangwe and Sakayola

Division of Partnership Profit for the Year Ended 31 December 2016

Total Twaambo Sinyangwe Sakayola

K K K K

01 January to 31 July 2016

Salaries 14,292 8,750 5,542 -

Share of Profit Balance (3:2) 55,708 33,425 22,283 -

70,000 42,175 27,825 -

01 August to 31 December 2016


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Salaries 15,000 4,583 5,000 5,417

Share of Profit Balance (5:3:2) 35,000 17,500 10,500 7,000

50,000 22,083 15,500 12,417

Total profit 120,000 64,258 43,325 12,417

Less income taxed at 0% (36,000) (36,000) (12,417)

28,258 7,325 -

Income tax

25% x K9,600/ K7,325 2,400 1,831

30% x K18,658 5,597 -

Income tax payable 7,997 1,831

3.3.6 Loss Relief

Let us now look at reliefs from taxation available to partners when their partnership makes

a loss.

You should carry forward trading losses by each partner and relieve them against future

partnership profits arising from the same trade.

3.4 Presumptive Taxes

What are the presumptive taxes and who is supposed to pay these taxes? Let us suppose

that your answer could be something like this;

The presumptive taxes are taxes chargeable on businesses where it is considered that it

could be both expensive and time consuming for both the tax payer and revenue authority

to compute and collect income tax in a normal way.


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This tax only apply to businesses whose annual turnover is less than K800,000 and to

passenger transportation businesses.

3.4.1 Turnover Tax

Turnover includes gross earnings, income, revenue, takings, yield or proceeds but does not

include interest, rental income, royalties and dividends.

Turnover tax has been introduced as a direct tax on turnover in respect of enterprises and

other business entities whose annual turnover is K800,000 or less.

3.4.2 Persons Liable to Turnover Tax

As tax consultant you are expected to know the persons who are liable to turnover tax.

These include:

i) Any person carrying on a business with an annual turnover of not more than

K800,000

ii) Any person whose income consists of amounts which are subject to

withholding

tax where withholding tax is not a final tax.

3.4.3 Persons who are not liable to Turnover Tax

We will now consider persons who are excluded from turnover and these include:

i) Any person carrying on a business with an annual turnover of more than

K800,000

ii) Any individual or partner carrying on business of public service vehicle for the

carriage of persons.

iii) Any person running a business where the annual turnover is not more than

K800,000 but is voluntarily registered for Value Added Tax.


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iv) Any partnership carrying on business irrespective of whether the annual

turnover is over K800,000 or not.

v) Any person whose business earnings are subjected to withholding tax where

withholding tax is the final tax.

vi) Any person who is involved in mining operations as provided for under the

Mines and Minerals Development Act.

vii) Income of partners arising from the partnership since the partnership is

excluded from turnover tax.

3.4.4 Payment of Turnover Tax

The Turnover tax is chargeable at 3% of the turnover. When calculating turnover tax, your

calculation should be based on the actual monthly turnover. The tax regulation on turnover

tax provides for the option of persons to file Turnover Tax returns manually by the 5th day

after the end the relevant month or electronically by the 14th day after the end of the

relevant month. Persons who file returns manually after the end of the relevant month or

after 14th day after the end of the relevant month will be charged late submission penalty.

At the end of the year, a taxpayer who pays turnover tax gets a repayment of any

withholding tax suffered in the tax year. This is done in the case where the taxpayer

provides the necessary evidence to that effect.

You should note that capital allowances are not available in respect of persons who pay

turnover tax. Assets of such a taxpayer are written down notionally in the years when the

tax payer is required to pay turnover tax.

Illustration

Question


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Kachoncho Enterprises expects its turnover for the year ending 31 December 2016 to be

K325,000. The turnover will be earned evenly throughout the year.

Kachoncho Enterprises Limited pays debenture interest of K20,000 (gross) every year. The

debenture interest is subjected to withholding tax at the rate of 15%.

Required

a) Calculate the monthly amount of turnover tax payable by Kachoncho Enterprises

Limited.

b) Explain how the withholding tax on debenture interest will be treated at the end of

the tax year.

Answer

a) Kachoncho Enterprises Limited Monthly Turnover tax

K

Monthly turnover (1/12 x K 325,000) 27,083

Monthly turnover tax (3% x K27,083) 813

b) Since Kachoncho Enterprises Limited pays turnover tax, the withholding tax

suffered on debenture interest can be claimed and would be repaid at the end of the

year at (15% x K20,000) K3,000

3.4.5 Presumptive Taxes for Transporters

The presumptive tax regime is a simplified scheme that is only available to individuals and

partnerships carrying on business of public passenger transport. You should know that

persons carrying on business for the transportation of passengers either as taxi or minibus

operators for reward do not pay income tax on profits neither do they pay turnover tax.

These pay presumptive taxes which are fixed estimated amounts based on the seating

capacity of the motor vehicle used in the transport business. The annual tax and daily rates

for 2016 are given below.


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Seating capacity Tax per annumTax per day

K K

Less than 12 passengers and taxis 1,200.00 3.20






From 64 passengers and over 14,400.00 39.40

However, you should take note that transport business operated by incorporated entities,

associations or trusts are required to pay tax under the normal income tax regime.

Further, presumptive taxes are collected either through a Zambia Revenue Authority’s

appointed agent or by the domestic taxes division at Zambia Revenue Authority cash

offices.

3.4.6 Reasons for Introduction of Presumptive Taxes

As you may be aware, most of the transport businesses in Zambia fall under the informal

sector. The informal sector, the world over, is difficult to tax because:

Governments lack a comprehensive list of these potential taxpayers;

The administrative cost of dealing with a large of returns from these small

taxpayers, are extremely high;

The informal sector businesses either keep poor accounting records or do not keep

any books of accounts at all.

Over the years, many of our taxpayers operating mini buses and taxis have complained that

they find it difficult to comply with tax requirements for the following reasons:

3.4.6.1 Complicated tax procedures


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Most transporters find it difficult to remember and comply with all their obligations under

the Income Tax Act, which include;

i. Filing returns and accounts by 30th June, every year;

ii. Filing Provisional Tax returns each quarter of the charge year to which the return

relates

iii. Paying Provisional Tax by the 14th day of the month following the end of every

quarter;

iv. Settling any penalties and interest where applicable;

v. Keeping up-to-date business records at all times, etc.

3.4.6.2 Low levels of tax literacy

Not all transport operators are knowledgeable about tax obligations. A good number of

them know very little about tax and some of them agree to the fact that they are not

literate enough to understand taxation or prepare business and accounting records.

3.4.6.3 High cost of hiring professional accountants to prepare accounts and

handle tax matters

Although tax consultants like you and professional accounting firms are ever ready to

handle all financial and tax matters of business entities, most operators feel they cannot

afford the high fees charged by these consultants.

3.4.6.4 Liquidity (cash-flow) problems

Some operators have expressed difficulty in settling the assessed tax, or provisional

taxes that they are asked to pay, because the amounts appear to be large and they are not

able to maintain bank savings as the daily takings are quickly disbursed to meet

numerous expenses.

3.4.6.4 Constant breakdowns


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Another common complaint from operators has been that their vehicles are down for a

good portion of the year and hence they disagree with the amounts assessed on them,

especially where they did not send returns and accounts (estimated assessments).

The above have compelled the Zambia Revenue Authority to seek to tax this group of

taxpayers differently, hence presumptive tax. The main objective of this measure is to

increase compliance by simplifying our tax process and ultimately reducing the

transporter’s compliance cost.

3.4.7 Benefits of Presumptive Taxes

As tax consultant, you should know the benefits that accrue both to the tax payer and tax

authority. What is important for you to note is that this tax is considered to be fair and

therefore encourages compliance.

3.4.7.1 Simplified Process

No more filing of returns.

No need for elaborate business records.

Predictable amount of tax to be paid hence eased planning.

3.4.7.2 Cash flow friendly

Since operators find it fairly easy to pay a whole range of fees on daily basis, such as

loading fees and because the amounts do not seriously disrupt their cash flow position, the

same principle of small regular payments of tax has been adopted in the presumptive tax

approach.

The levies can be broken down into smaller amounts to be paid more regularly, e.g. daily,

monthly or on a quarterly basis.


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3.4.7.3 No need for professional consultancy services:

Paying the levies will be straight forward as paying loading fees or other fees currently in

place. Hence very little intellectual or professional effort required.

3.4.7.4 Equity

As the system is made simpler, all transporters will be expected to pay their part hence no

“free riders” as is currently the case.

3.4.7.5 Allowance for breakdown

The levies will only be charged for vehicles that are on the road during the particular

tax period and where there is a breakdown; the transporter is required to notify ZRA in

writing within reasonable time.

3.5 Exercise

Attempt to answer the questions below to test your understanding on Unit 3 topics:

1. Explain how the taxable profits of partnerships are arrived at.

2. Inonge and Cheelo are in partnership sharing profits and losses in the ratio 2 to 1

after allowing an annual salary of K78,000 to each one of them. There partnership

accounts are prepared annually to 31 December. During the year ended 31

December 2016, the partnership had a tax adjusted profit of K158,473. You are

required to compute the tax payable by each partner.

3. Explain how taxable profits of a partnership are shared by partners when there is a

change in the partnership agreement part way in the accounting period.


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4. Explain the concept of turnover tax giving the types of persons liable under the

turnover tax system.

5. Explain the benefits of the presumptive tax system.

6. Give reasons as to why the presumptive tax system was introduced in Zambia

3.6 Summary

In this Unit you have been shown how to computation of taxable business profits for a

partnership business and the income tax payable by each individual partner. We further

explained to you the types of businesses liable to turnover tax and its computation. The

concept of presumptive tax was also discussed including the rationale and benefits of

presumptive taxes. In case you are not sure of any part of this unit, please go back to that

particular section of the unit and make sure you understand and are able to apply the

principles discussed in this unit.


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UNIT 4

Taxation of Income from Employment

4.1 Introduction

In the previous unit, you learnt how to calculate taxable trading profits of partnership

businesses and taxation principles of presumptive taxes including turnover tax. In this unit,

you will learn how to compute taxes on income from employment. You are expected to use

the applicable tax rates and allowances given in this module for the charge year (tax year)

2016.

4.2 Objectives


i) Explain and define the meaning of the term emoluments

ii) Distinguish between an employee and a self employed person

iii) Explain the basis of assessment for emoluments from employment

iv) Explain the tax treatment of various payments made to employees and calculate

the taxable or exempt amounts within those payments

v) Describe the rules used for identifying allowable expenses

vi) Calculate income tax on the payments made on termination of employment

vii). Explain the operation of the Pay As You Earn System, and discuss its advantages

and disadvantages.


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4.3 Emoluments, Employment and Office

You should know as a tax expert that income tax is chargeable under Pay As You Earn

(PAYE) system on emoluments from an office or employment.

The term emoluments mean total earnings of an employee from employment. These

include wages, salaries, overtime, leave pay, commissions, fees, bonuses, benefits or

gratuities and any other payments from employment or office.

Employment exists where there is a legal relationship of master and servant. You as

employee will be a servant while your employer a master. This relationship of master and

servant may be evidenced by a contract or may be implied by conduct. A contract may be

an oral or written contract.

An office is a position that exists independently of the person presently occupying it and

must be capable of being declared vacant. The existence of a position that can be filled by

any eligible person is strong grounds for concluding that the operation of the PAYE system

will be required.

As a general rule, all payments which are received by an individual who is in employment

are taxable unless they are specifically exempt under the provisions of the Income Tax Act.

4.4 Employment and Self-employment

This Unit is intended to emphasize the issues, which arise in determining whether an

Individual is employed or self -employed. This distinction is quite significant for tax

purposes. We will analyze the comparative impact of tax on employed individuals and the

self-employed individuals.


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The following principles should be taken into account in deciding if a person is employed

or self employed.

The main test of an employment as opposed to self-employment is the existence of a

contract of service (employee) compared with a contract for services (self employed).

If there is no contract of service, the following suggest employment.

• An obligation by the employer to offer work and an obligation by the

employee to undertake the work offered. An employee would not normally

be in a position to decline work when offered.

• The employer controls the manner and method of the work.

• The employee is entitled to benefits normally provided to employees such as

sick pay and holiday pay.

• The employee is committed to work a specified number of hours at certain

fixed times, and is paid by the hour, week or month.

• The engagement is for a long period of time.

• The employee does not provide his own equipment.

• The employee is obliged to work personally and exclusively for the employer,

and cannot hire his own helpers.

• The work performed by the employee is an integral part of the business of the

employer and not merely an accessory to it.

• The economic reality of self-employment is missing - namely the financial

risk arising from not being paid an agreed, regular, remuneration.

• The employee cannot profit from sound management.The University of Zambia, Institute of Distance Education

88

While accepting the fact that this distinction is often hard to make, there are a number

of tests to be considered when determining whether or not there is employment. These

are:

The Control Test

The Mutual obligation test

The Integration test

The economic reality test

4.4.1 The Control Test

If an individual can or is able to exercise control over the affairs of the business, there is

a strong indication that a contract for service exists.

4.4.2 The mutual obligation test

Has one party an obligation to provide work, and has the other party an obligation to do

the work provided? If the answer is yes, this is an indication of a contract of service.

This test is more relevant where there is a series of engagements between the parties,

and the worker is attempting to establish employment rights.

4.4.3 The integration Test

Does the party providing the Services do so as an integral part of the other party's

business? If yes, this is an indication of a contract of service.


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4.4.4 The economic Reality test

Do the activities of the person providing the services form a trade or profession in their

own right? That is:

Does the individual provide his own equipment?

Does he hire his helpers?

What degree of financial risk does he take?

What degree of responsibility for investment has he got?

Does he have an opportunity to profit from sound management in the

performance of his task?

The following may also be used in the analysis:

The extent of personal service

Basis of payment

Holiday pay, sick pay and pension rights

Right of dismissal

Length of engagement.

In general, the ZRA will insist upon a detailed examination of all facts, which may

include documentary or oral evidence of the terms of engagement, as well as the actual

practices and stated intentions of the two parties.

4.5 Tax Implication or Income Tax Scope

An employee is taxable under Employment Income rules under the Pay As You Earn

System (PAYE).

A self employed person is taxable under Trading Income rules discussed in unit two and

unit threeThe University of Zambia, Institute of Distance Education

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4.6 Basis of Assessment

Individuals are assessed on the amount of emoluments received in the tax year. The date

received is taken as the earlier of the date when the employee became entitled to the

payment or the date when it was actually received by the employee.

4.6.1 Reflection

Mr. Mumbi Chandalala is a self self-employed human resources consultant. He started to

work on his own account on 1 January 2016 after he resigned his position of human

resources manager at ChiChi Limited.

Chichi Limited did not fill up Mr. Chandalala’s position since his resignation. Instead, the

company’s Chief Executive Officer has hired Mr. Mumbi Chandalala to continue offering

the services of human resources management to ChiChi company. Mr. Chandalala spends

half of his time working for ChiChi Limited. Since this offer, he has continued to use the

same office he had used when he was employed as human resources manager.

Mumbi Chandalala uses his own equipment to perform his human resources management

function and other duties for ChiChi Limited. The company pays him an agreed amount at

the end of the month.

Mr. Chandalala has several other clients he offers similar services as ChiChi Limited and

they all pay him an agreed amount on a monthly basis.

ChiChi Limited has treated Mumbi Chandalala as a self employed contractor and has

therefore not taxed the payments made to him since the commencement of the contract.

The chief executive officer of Chichi Limited has heard Mr. Chandalala may in fact be a

part-time employee of the company, other than a self-employed contractor. The CEO is


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worried that there may be penalties to be suffered for not deducting tax from Chandalala’s

payments.

Required

Describe the tests that should be taken into consideration to distinguish between an

employee and a self employed person and explain the implication of the outcome of the

tests on Mumbi Chandalala.

Solution

We hope that your answer discussed the fact that employment exists when there is a legal

relation of master and servant which can be evidenced by a contract or which can be

implied.

We also imagine that in your response, you will recognise the fact that there are a series of

tests that are applied and that the most significant being whether the contract amounts to a

contract of service or a contract for services.

In an event that it is established Mr. Chandalala is an employee, then any income arising

should be treated as emoluments taxable under the Pay As You Earn system. If it is

established that he is self-employed, the income arising will be taxable as business profits.

4.7 Taxable and Exempt Emoluments

We will now look at the tax treatment of various payments which employees may be

entitled to. You should however know that generally all emoluments and benefits an

individual receives from employment are taxable with just a few exceptions.


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4.7.1 Salaries, wages and bonuses

You should treat these as taxable emoluments without exception. You should tax the actual

amount received by an employee in full. The exception is where the salary is equal to or

less than the tax free pay (i.e. amount taxed at 0%) which for 2016 is K36,000. If this is the

case and the salary is the only entitlement that the employee receives, then that salary will

not be taxable. Similarly, if an employee’s net amount of emoluments after deducting the

pension contributions is not more than the tax free pay, then that employee will not pay

tax.

4.7.2 Allowances paid to employees

Let us now talk about allowances paid to employees. All allowances qualify as

emoluments and are fully taxable as such. However, an employee is being reimbursed any

expenditure incurred while performing the duties of employment, the only the excess of

the reimbursed amount over the actual expenditure incurred by the employee shall be

taxable. This normally happen in cases where an employee is required to spend personal

money while performing official duties and then submit receipts to the employer for

reimbursement.

4.7.3 Benefits in Kind

Although PAYE was originally applied only to money payments it has since been extended to

certain benefits in kind, notably cash Free Residential accommodation extended to Employees,

Personal to Holder Vehicles provided to Employees, Utilities paid by the Company on behalf of

Employees, and cost of Meals provided by the Employer.


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The Income Tax Act provides that the cost of any advantage or benefit which is not capable of

being turned into Money or Money’s worth that is provided to employees is not allowed as a

deduction for Tax purposes.

In addition, such benefits or advantage are not subject to PAYE in the hands of the employee. The

term benefit in kind includes many items such as free holidays, housing and the private use of

Company Cars.

The benefits which can be converted into cash are taxable on the employees receiving them.

4.7.3.1 Funeral benefits

Payments made in respect of assisting an employee with family bereavement are not

taxable emoluments.

4.7.3.2 Medical expenses

For expenses incurred by the employer on behalf of employees and their family for

medical treatment, you should treat such as non-chargeable emoluments.

On the other hand, a medical allowance paid to an employee is taxable emoluments.

4.7.3.3 Board, lodging and meals

You should not recognise any taxable emoluments where an employee is provided with

meals or board and lodging by the employer.

However, where an employee receives an allowance in lieu (as substitute) thereof, the

allowance received would be a taxable emolument. Where an employee is required to

work late at night such that it would be unreasonable to expect that employee to use public

transport for the journey back home, then the cost to the employer of providing the

employee with private transport home is not a taxable emolument.


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4.7.3.4 Clothing or Uniform allowance

Where an employee receives an allowance for the purchase of uniforms for official

purposes or functions, you should treat the allowance received as taxable emolument of the

employee. However, employees may claim for expense relief in respect of any amounts

incurred on the purchase of uniforms for use in the performance of official duties.

4.7.3.5 Maintenance of a residence by the employer

You should treat any amounts paid by the employer to assist an employee in meeting the

cost of the upkeep of their residence as taxable emoluments of the employee.

Where the employer undertakes to pay all the outgoings in respect of the house including

rates, rent, taxes, insurance, security, electricity, telephones, entertainment and the general

maintenance of the residence including the surroundings, then this constitutes money’s

worth and is taxable on the employee as emoluments.

4.7.3.6 Cash vouchers

We first begin by defining a cash voucher. A cash voucher is any document or stamp

capable of being exchanged, either immediately or after a time for a sum of money

equivalent to the stipulated value.

Where a cash voucher is provided to an employee by reason of employment, the employee

should be treated as having received a taxable emolument.


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4.7.3.7 Non- cash Vouchers

A non cash voucher is a document usually capable of being exchanged for good goods or

services. It may be exchanged immediately or later. Examples that you may be familiar

with include Christmas vouchers, shopping vouchers, fuel voucher etc.

Where an employee receives a non-cash voucher, you tax the employee on the value of

goods which the employee obtains on that voucher.

4.7.3.8 Restrictive undertakings

A payment made by an employer in respect of an agreement entered into by an employee,

the effect of which is to restrict the activities of the employee, or the ability to compete

with the employer, is a taxable emolument of that employee.

4.7.3.9 Compulsory Payments for board

Where arrangements exist to pay wages to employees at gross, out of which a certain

amount must go towards the payment for board, the gross amount payable to the employee

is a taxable emolument.

4.7.3.10 Tips and service charges

Where an employer operates a scheme under which employees are paid tips from

customers or service charges the amounts paid to employees are taxable emoluments on

those employees and so you should tax them.

4.7.4 Reflection

1. Explain what the term emoluments refer and describe their tax implication generally.


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We hope your answer is similar to the one given below.

Emoluments refer to all payments that an employee is entitled to by reason of employment.

All such payments are therefore chargeable on employees with the exception of a few

which include the following:

Benefits in kind that cannot be converted into cash,

Medical expenses incurred by the employer,

Board and lodgings provided by the employer.

4.8 Allowable Expenses

In this sub-unit, we will consider the deductible expenses available to employees that can

reduce their taxable income. The allowable expenses available to employees are as

follows:

4.8.1 Travelling expenses incurred in the course of employment.

You should take note that these are expenses that an employee incurs while performing the

duties of employment. The following are examples:

i) Costs incurred in travelling between two places at which the duties are to be

performed.

ii) Costs incurred in travelling between home and work if the duties commence at

home, as in the case of medical doctors who are on call.

However, you should realize that the following travelling expenses are not deductible:

i) Costs incurred when travelling between two employments, as in the case of

employees working full-time contract with one company and on part-time

contract with another. You should treat such as not deductible.


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ii) Costs incurred in travelling between home and work, unless duties commence

at home as explained in the case of a medical doctor above whose duty

commence when he or she receives a call.

4.8.2 Capital allowances on implements, plant and machinery used wholly and

exclusively in the performance of duties of employment.

This arises in cases where you as employee are required to provide your own tools and

equipment as in the case of tradesmen. However, where you opt as employee to use your

own tools when the employer has already provided suitable tools, then you cannot claim

capital allowances on those tools.

4.8.3 Contributions to approved pension funds.

The amount that is allowable is restricted to the lower of;

a) 15% of the emoluments, and

b) K3,060 for the year 2016 charge year (i.e K255 per month)

Where employees are members of more than one approved funds, please not that the

restriction on the allowable amount relates to the total contribution to all the approved

funds.

4.8.4 Subscriptions to professional bodies which are relevant to the employment.

As an accountant for example, you will be entitled to an allowable deduction for

subscriptions paid to the Zambia Institute of Chartered Accountants.

Subscriptions paid to professional bodies whose membership is not relevant to the

employment are not deductible.


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4.8.5 Mortgage interest paid in respect of the property acquired for the occupation

by the employee and their family where interest is payable at the rate at which a

building society would charge.

4.9 Payments Made on termination of employment.

When an employment terminates, through the employee leaving or through his death, an

employer may make various payments, depending on the circumstances giving rise to the

cessation. The following are usually the circumstances:

Resignation

Dismissal

End of contract

Normal retirement

Retrenchment/Redundancy

Early retirement

Death

Retirement on Medical Grounds


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4.9.1 Tax Consequences of Resignation

Let us start by examining the tax treatments of payments made to an employee who has resigned

from his position.

Where an employee is dismissed or resigns, the following payments are usually made:

Emoluments for example. salary, wage, overtime, leave pay, commission, bonus,

fee;

cash in lieu of leave (leave days due but not taken);

salary in lieu of notice;

severance pay; and

Gratuity. (see treatment for gratuity in 4.11.2 (ii) below)

The first four payments above are added together and taxed as normal income, without exempting

any amount.

4.9.2 Tax Consequences of end of Contract

We now discuss the tax consequences of payments made at the end of contract.

Where an employment ceases at the end of a contract, the following payments are usually made:

Final salary

Gratuity

Leave pay

Repatriation

These payments will be taxed as follows under Income Tax Act:-

i. Final salary, leave pay, and repatriation will be added together and taxed as normal income,

in the month in which payment is made.

ii. Gratuity that is payable with reference to a fixed contract is taxed separately at the rate of

25% on the amount that exceeds the tax free pay (i.e. For 2016 charge year First K36,000

will be taxed at 0% and the balance at 25%). This will be so as long as the contract term

and the completed term is at least two years and the amount of gratuity is not more than

25% of the cumulative basic pay. Where the gratuity is more than 25% of the cumulative

basic pay in respect of such a contract, then the excess of the gratuity over 25% of theThe University of Zambia, Institute of Distance Education

100

cumulative basic pay does not qualify as gratuity. You would therefore need to add that

excess amount to the payments that are taxable under the normal PAYE system. You

should take note that if the gratuity is payable in respect of a fixed contract and the above

conditions are not met, then that gratuity will be added to the final salary, repatriation pay

and leave pay and taxed under the normal PAYE system.

iii. Where a gratuity is payable to permanent and pensionable staff, then the first K35,000 is

exempt from tax and the balance taxed at 10%.

However, after the signing of the amended constitution, a pension benefit became tax exempt. In

this case, a pension benefit include a pension, compensation, gratuity or similar allowance in

respect of a person’s service. As such, this amendment therefore extends the tax exemption to

compensation, gratuity, severance pay, repatriation and other similar allowances received in

respect of a person’s services at cessation of employment or expiry of contract. This

amendment is with effect from 5th January 2016. You should take note also that the constitution

does not classify gratuity between qualifying and non-qualifying. Further, you should always

remember that the constitution is superior to any other law including the Income Tax Act and

guidance on tax treatment of the pension benefits in the constitution supersedes that of the

Income Tax Act.

Illustration

Question 1

Mr. Akende had been employed on a four year contract that commenced 1 January 2013 and

expired on 31 December 2016. His annual basic pay was K144,000 during 2013, K156,000 during

2014, K168,000 during 2015 and K180,000 during 2016. He was paid on monthly basis. On expiry

of his contract Akende was paid a gratuity of 20% on his cumulative basic pay and his accrued

leave pay of K15,000. He received his final salary on 24 December 2016.

Required

Calculate the total income tax payable by Mr. Akende for the tax year 2016. You should ignore

pension contributions.

Answer


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Mr. Akende

Computation of Personal Income tax for the tax year ended 31 December 2016

K K

Emoluments

Basic Salary ( 12/12 x K180,000 ) 180,000

Accrued leave pay 15,000

Chargeable income 195,000

Less tax free pay (i.e. amount taxed @ 0%) (36,000)

159,000

Income tax paid

25% x K9,600 2,400

30% x K25,200 7,560

35% x K124,200 (Balance) 43,470

Gratuity

[K144,000 + K156,000 + K168,000 + K 180,000]

(20% x K648,000) 129,600

Less Exempt gratuity amount (129,600)

,0 .

Total Tax Paid for 2016 53,430

Note that details of the basic pay applicable throughout the term of contract are provided to enable

you calculate the contract gratuity. Income tax will be payable on salary for the period 1 January

2016 to 24 December 2016 as well as accrued leave pay. Gratuity is now tax exempt as provided

for in the amended constitution.

Question 2


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Ms. July Mulenga who was employed on 1 January 2015 for a three year contract at Yunza Limited

resigned from her position on 31 October 2016. Her annual salary was K180,000 during 2015 and

K210,000 during 2016 which was paid monthly.

When she resigned Yunza Limited paid her gratuity of 25% of the cumulative basic pay up to the

date of resignation and her accrued leave pay of K8,000 together with the final salary.

Required

Calculate the total income tax payable by Ms. July Mulenga for the tax year 2016.

Answer

Ms. July Mulenga

Computation of Personal Income tax for the tax year ended 31 December 2016

K K

Basic Salary (10/12 x K210,000) 175,000

Leave pay 8,000

Chargeable Income 183,000

Less tax free amount (36,000)

147,000

Income tax paid

25% x K9,600 2,400

30% x K25,200 7,560

35% x K112,200 (Balance) 39,270

Total Income Tax paid 49,230

Please note that Ms. July Mulenga was initially engaged (employed) on a three year contract but

resigned after serving for one year ten months. Although she was entitled to gratuity of 25% on her

cumulative basic pay, that gratuity would not be qualifying under the Income Tax Act because the

term of the contract served up to the time of resignation is less than two years. As such, you couldThe University of Zambia, Institute of Distance Education

103

have added the non-qualifying gratuity on the regular income and tax under the normal PAYE

system. Further, only the proportion of income received in 2016 (i.e. January 2016 to October

2016) would have been subject to tax.

However, under the provisions of the new constitution, the whole gratuity is tax exempt.

Question 3

Miyoba had been engaged on a three year contract that commenced on 1 January 2014 and expired

on 31 December 2016. On 31 December 2016, he received his gratuity at 35% of his cumulative

basic pay and the accrued leave pay of K12,000. His annual basic pay was K130,000 during 2014,

K150,000 during 2015 and K180,000 during 2016 and was paid on a monthly basis.

Required

Calculate the total income tax payable by Mr. Miyoba for the tax year 2016.

Answer

Mr. Miyoba

Computation of Personal Income Tax for the tax year ended 31 December 2016

K K

Basic Salary (12/12 x K180,000) 180,000

Leave pay 12,000

Chargeable income 192,000

Less tax free pay (36,000)

156,000

Income tax paid

25% x K9,600 2,400

30% x K25,200 7,560


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35% x K121,200 (Balance) 42,420

Total Income Tax paid 52,380

Here you should take note that Mr. Miyoba completed his three year contract and received a

gratuity at 35% of his cumulative basic pay. Since this gratuity exceeds 25% of his cumulative

basic pay, only the first 25% will be qualifying gratuity under the Income Tax Act. Under the same

Act, You are should have added the remaining 10% to the regular payments and subject the total to

tax under the normal Pay As You Earn (PAYE) system. Remember that for a gratuity to be treated

as a qualifying gratuity, the contract term and the completed term should be at least two years and

the amount of gratuity receivable on completion of that contract should not be more than 25% of

the cumulative basic pay earned during the contract term.

However, under the provisions of the new constitution, the whole gratuity is tax exempt.

4.9.3 Tax Consequences of Normal Retirement

Where an employee goes on normal retirement, the following payments are usually made:

Salary

Leave pay

Repatriation

Pension from approved fund

Accrued service bonus

Severance pay

You should tax these payments above as follows:

Salary and leave pay are added together and taxed as normal income under PAYE, in the

month in which payment accrued to the employee.

Repatriation, service bonus and severance pay are added together, the first K35,000 is

exempt from tax and the balance taxed at 10%.

Pension from an approved funds exempt from tax

4.9.4 Tax Consequences of Retrenchment or Redundancy

The following payments may be made to an employee who has either been declared

redundant or has been retrenched:


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Salary;

Leave pay;

Repatriation pay;

Refund of pension contributions (from an approved pension scheme);

Salary in lieu of notice;

Severance pay;

Accrued service bonuses;

Compensation for loss of office.

The above payments are taxed as follows:

Salary, Leave pay, Salary in lieu of Notice, Accrued service bonuses are

taxed under PAYE in the month in which they accrued to the employee;

Repatriation allowance, Severance pay and Compensation for loss of

office shall be taxed as follows:

The first K35, 000 is exempt from tax and the balance is taxed at 10%

The refund of employee's pension contribution is taxed as a lump sum

payment at the rate of 10%.

The refunded employer's pension contribution will be subjected to tax

under the PAYE system.

4.9.5 Tax Consequences of Death of an Employee

Where an employee dies the following payments are usually made:

Salary

Leave pay

Gratuity

Ex-gratia payment

Accrued service bonuses and

Pension

You should know that these payments are taxed as follows:

The ex-gratia payment is exempt from tax, if it was not part of the contractual conditions

of service. (See definition of ex-gratia payment below).

The salary up to date of death, leave pay and accrued service bonuses are taxed

under PAYE in the month in which the payments accrued to the employee.


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Salary, leave pay, are added together and taxed as normal income in the month in

which payment is made.

Gratuity is taxed as in 4.11.2 (ii) above.

The tax treatment of pension is the same as for early or normal retirement in 4.11.3

above.

4.9.6 Tax Consequences of Retrenchment on Medical Grounds

Where the employer, on medical advice from a Government institution, determines that an

employee is permanently incapable of discharging his/her duties through infirmity of mind

or body, may terminate the services of an employee.

39

Where an individual is retired on medical grounds, the following payments are usually

made:

Salary

Leave pay

Lump sum

These payments are taxed as follows:

Salary and leave pay are taxed as normal income in the month in which payment is

accrued to the employee.

The lump sum payment is exempt from tax.

4.10 PAY AS YOU EARN REGULATIONS

Let us now discuss the Pay as You Earn System. As you may have already seen from the

previous sub-units above, Pay as You Earn (P.A.Y.E) is a system of deducting tax from

individuals whose main source of income is from Employment. In Zambia, It was first

introduced on 1st April 1966 and has remained in force ever since. You are also expected to

know that the operation of PAYE is based on the Income Tax (Pay As You Earn) Regulations. It

is important for you to understand that under Pay as you earn system, the responsibility relating

to tax compliance vest on the employer and not the employee. You are strongly advised to refer


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to the Zambia Revenue Authority’s latest practice notes for the applicable in each new tax year

as amended.

Where the employer employees both casual and full time employee, always remember that

PAYE applies to casual employees as well as full time.

You should also take note that tax under Pay as You Earn is to be deducted not only from

monthly payments but also from weekly, daily, annual or payments that are not regularly made.

for the purposes of PAYE, chargeable emoluments means emoluments from an employee’s

employment which are chargeable to Income Tax, but does not include any allowable pension

contribution or any amount which is exempt from Income Tax.

4.10.1 Documentation Required to Operate PAYE

Registration requirements for PAYE are as prescribed by Zambia Revenue Authority at

the time of registration for Tax Payer Identification Number (TPIN) and Registration

for Income Tax. The registration of TPIN and Income tax is now done online including

the submission of the prescribed documents to support the application.

Once you have been registered for Income Tax you will be required to file an electronic

return on a monthly basis for Pay as You Earn.

14.10.2 Duties of Employer

The purpose of the PAYE system is to deduct the correct amount of income tax over

the year. So then what are some of the duties of the employer?

The employer has a duty to:

(a) deduct income tax from the pay of his employees

(b) keep a record of each employee’s pay and deductions


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(c) Provide details on the number of employees at beginning and end of the period

(month) and those that have joined and separated with the employer during that

period.

(d) Employers must file and send income tax - Pay as You Earn returns to the

Revenue authority (i.e. ZRA) electronically and make their monthly PAYE

payments electronically or by cash by the 14 th day after of the month

following the end of the month in which the emoluments were paid.

(e) Where the tax is not paid on time and/ or the return not filed by the 14th day

discussed in (c) above, penalties and interest on overdue tax are charged. These

will be borne by the employer and not the individual employees.

(f) Send appropriate returns in addition to the employee details when required.

Please take note that effective 2014 charge year, employers are no longer required to

submit annual Pay As You Earn Returns (P18).

Further, Zambian citizens working for foreign missions, international organisations or

other employers governed under the Diplomatic Immunities and Privileges Act are

personally required to declare and pay tax every month. It is therefore mandatory for all

such employees to register for Pay As You Earn.

For individuals on direct payment schemes under Pay as You Earn, provide returns for

monthly remittance of tax.

4.10.3 Personal Income Tax Brackets

There are four “tax brackets" that are used to calculate the percentage of taxable income

that must be paid to Zambia Revenue authority for the 2016 charge year. They have

been provided for your reference below.


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Income Bands Rates

First 36,000

Above K36,000 up to K45,600

Above K45,600 up to K70,800

Above K70,800

@ 0%

@ 25%

@ 30%

@ 35%

4.11Exercise

Attempt to answer the questions below to test your understanding on Unit 4 topics:

1. (a) Mujwa had been employed on a three-year non-renewable contract that expired on 31 May

2016. Her annual basic salary for each year she worked had been as follows:

1 June 2013 to 31 May 2014 K120,000

1 June 2014 to 31 May 2015 K132,000

1 June 2015 to 31 May 2016 K144,000

She had been entitled to the following allowances:

K

Uniform allowance per annum 3,000

Utility allowance per month 400

Housing allowance per month 900

Medical allowance per month 300

Her conditions of service provided for an end of contract gratuity of 32% of her cumulative basic

salary for the three-year period. At the end of contract she did not have any other income during

the tax year 2016. The payments made by her employer for the tax year 2016 included:

K

Income tax paid under the PAYE system 30,300

NAPSA contribution 5,000


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Contribution into employer’s approved pensions scheme 5,760

Purchase of her uniforms used when performing duties 2,600

Donation to local approved charity 600

Subscription to professional body relevant to her Employment 1,200

Payment of school fees for her children 4,200

Required:

Calculate the final amount of income tax payable by Mujwa for the tax year 2016.

(b) The basis of assessment for emoluments from employment is the actual receipt basis.

Required:

Explain the receipt basis as it applies to the taxation of emoluments from employment.

2. Mr. Habasimbi’s cumulative basic salary was K28,000 to 30 April 2016. A 5% pension was

being deducted from the basic salary. The cumulative PAYE was K4,503 to 30 April 2016. What

was the PAYE for May 2016 assuming Mr. Habasimbi is registered as a person with a disability

and there were no income changes from 1 January to 30 April 2016?

3. Explain the meaning of emoluments for purposes of Pay as You Earn.

4. What types of benefits in kind are assessable on employees?

4.12 Summary

In this Unit you have been taught how Income tax is chargeable on emoluments from an

office or employment under the Pay as You Earn (PAYE) system. We have also explained a

series of tests that distinguish between an employee and a self-employed contractor. You have

been told what emoluments are and the tax treatment of benefits in kind that may be

provided by the employer to an employee. You have also been taught how to compute

chargeable tax on payments made termination of employment.

We have also explained to you the criteria to be used in distinguishing between qualifying

and non-qualifying gratuity. Finally you were introduced to the concept of Pay as you earn

System used to collecting income tax from employment or from holding an office..The University of Zambia, Institute of Distance Education

111

If you are not sure of any part of this unit, please go back to that particular section of the

unit and make sure you understand it and that you are able to apply the principles

discussed in this unit.

5.0Module Summary

We are glad that you have successfully completed the first module in the BAF 2011 courseon the Introduction to Taxation and Taxation of Individuals and. We hope that you are confident enough to:

(i) Define key (concepts) terms influencing income tax and the most important rules

affecting tax;

(ii) Describe how business profits are taxed and explain the allowances that businesses

can claim in order to reduce their tax liabilities;

(iii) Discuss how the taxation of partnerships is done;

(iv)Explain how to deal with presumptive taxes;

(v) Discuss how income received from employment is taxed and explain how the Pay

as you Earn system works; and

(vi)Discuss the difference between income from employment and income from self-

employment;

Just in case you are doubtful on the issues highlighted above, kindly do revise your module

again. We wish you the best as you now turn to module 2, which is the second and last in

the series before completing the BAF 2011 course, Principles of Taxation. In that module,

we shall focus on taxation of investment Income, Taxation of corporations (i.e.

companies), taxation of farming enterprises, customs and excise duties, value added tax

(VAT) and administrative issues related to direct taxes. Further, we shall explain to you to

the concepts of taxation on the topics above on both corporations and unincorporated

businesses.


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REFERENCES

ZICA 2016 Study Manual. ( 2015). Taxation T5, BPP Learning Media, 4th edition, BPP

House, Aldine Place, London.

ZICA 2013 Study Manual. ( 2012). Taxation T5, BPP Learning Media, 1st edition, BPP

House, Aldine Place, London.

Mulenga, H, M. (2015). Taxation in Zambia, ZICA, Multimedia Zambia, Lusaka

ACCA Study Text (2016). Taxation (UK) F6, BPP Learning Media, London , BPP House, Aldine Place, London.

Mulolani, C.A (2015). Foundation Taxation, 7th edition, Zambia Publishing House,

Lusaka.

Income Tax Act (Amended 2015), Government Printers, Lusaka.

Zambian Constitution (Amended 2016), Government Printers. Lusaka.

Zambia Revenue Authority Practice Notes (2016). https://www.zra.org.zm

Zambia Revenue Authority (2016) Budget Highlights. https://www.zra.org.zm


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https://www.zra.org.zm/

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