Practice Note No. 01 Date of Issue 15th December 2004 BASIS PERIOD FOR BUSINESS & NON-BUSINESS SOURCES 1.0 TAX LAW. This Practice Note applies in respect of section 20 of the Income Tax Act, 2004. It is effective for the year of assessment 2005 and subsequent su bsequent years of assessment. 2.0 2.1
INTERPRETATION. In this Practice Note, unless context requires otherwise “Act” means the Income Tax Act, 2004. “Basis year for a year of income” means a calendar year coinciding with the year of income. “Operations” include an activity activ ity which consists of: (i) the conducting a business (ii) the conducting an investment (iii) both the conducting of a business and investment i nvestment (iv) the conducting of investment prior to commencement of a business or cessation of a business.
2.2
Definitions and expressions used in these Notes that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act.
2.3
If the changes of accounting date are made in two consecutive accounting periods and the determination in paragraph 4.6 of these Notes cannot be applied because a year of income or an accounting period will be left out, the Commissioner Commissioner will, upon application by the entity give specific directions.
2.4
In the case of apportionment of accounting periods, any fraction of a month is to be treated as falling into the first period [see the Example in paragraph paragraph 4.6.3B]
3.0 THE APPLICATION APPLICATION OF THIS PRACTICE NOTE: This Practice Note considers the determination of the basis period for: 3.1 an entity commencing its operations; 3.2
an entity changing the accounting date of its existing operations; and
3.3
a company joining a partnership.
4.0 4.1
4.2
HOW THE TAX LAW APPLIES. An entity is chargeable to income tax in respect of all its sources of income for a year of income (hereinafter also referred to as Y/I). The income from a source is determined in relation to the basis period for a year of income.
4.3 General Except where paragraph 4.4 below applies, the calendar year is the basis period for that year of income in relation to all sources of income of an entity. Example An entity which has business income and dividend income prepares its accounts from 01.01.2005 to 31.12.2005. The basis year ending 31.12.2005 is the basis period for the Y/I 2005 for all of the entity‟s
sources.
4.4 Accounts made up for 12 months not ending on 31 December Where the accounts of an entity are made up for 12 months ending on a date other than 31 December, that accounting period is the basis period for the year of income in which the accounts are closed for all al l its sources of income.
Example An entity makes up its accounts from 01.07.2004 to 30.06.2005. 30.06.2005. Its sources of income i ncome are business, rental and interest. The period from 01.07.2004 to 30.06.2005 is the basis period for the Y/I 2005 for all its i ts sources of income. 4.5 Commencement Commencement of operations 4.5.1 Accounts prepared for less than or more than 12 months ending on 31 December Where an entity commences operations and its first accounts are prepared for a period of less than or more than 12 months ending on31 December. Example 1 An entity commences operations on 11.05.2005 and the first accounts are cl osed on 31.12.2005. The accounting period 11.05.2005 to 31.12.2005 31.12.2005 is the basis period for the Y/I 2005. Example 2 An entity commences operations on 01.09.2004 and the first accounts ar e closed on 31.12.2005. The period from 01.09.2004 to 31.12.2004 is the basis period for Y/I 2004. The period from 01.01.2005 to 31.12.2005 is the basis period for Y/I 2005. 4.5.2 Accounts prepared for 12 months Where an entity commences operations and its first accounts are made up for 12 months, that accounting period is the basis period for the year of income in which the accounts are closed. Example An entity commences operations on 01.07.2004 and its first accounts are prepared for the period 01.07.2004 to 30.06.2005. The accounting period 01.07.2004 to 30.06.2005 is the basis period for Y/I 2005. There is no basis period for the Y/I 2004. 4.5.3 Accounts prepared for less than or more than 12 months and not ending on 31 December Where an entity commences operations and its first accounts are made up for less than or more than 12 months not ending on 31 December, the basis period for the year of assessment is the year ending on 31 December each year until accounts are made up for a 12 month accounting period. Example 1 An entity commences operations on 26.06.2005 and accounts are made up to 30.04.2006 (>10 months), and subsequently to 30.04.2007. The basis period of the Y/I 2005 is 26.06.2005 to 31.12.2005 31.12.2005 The basis period for the Y/I 2006 is 01.01.2006 to 31.12.2006 The basis period for the Y/I 2007 is 01.01.2007 to 30.04.2007. 30.04.2007. Example 2 An entity commences operations on 26.06.2005 and accounts are made up to 30.09.2006 (>15 months), and subsequently to 30.09.2007. The basis period for the Y/I 2005 is 26.06.2005 to 31.12.2005 31.12.2005 The basis period for the Y/I 2006 is 01.01.2006 to 31.12.2006 31.12.2006 The basis period for the Y/I 2007 is 01.10.2007 to 30.09.2007 30.09.2007 .
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4.5.4 An entity with existing operations commencing new operations Where an entity, which is already carrying on one or more operations, commences a new operation, the basis period for the existing operations is also the basis period for the new operation. Example An entity has been in operation for several years and makes up its accounts ending on 30 September each year. The company starts a new operation on 01.06.2005. The basis period for its existing operations is the accounting year ending on 30 September. The basis period for the new operation for the Y/I 2005 is therefore 01.06.2005 to 30.09.2005. 4.5.5 Same accounting date as related companies in a group Where an entity commences an operation and makes up accounts to the same day as that of the other related companies in a group, the first basis period for the company is from the date it commences the operation to the date the accounts are closed. Example A company, being a member of a group of companies, commences operations on 15.01.2005 and closes its first accounts on 30.09.2005 to coincide with the financial year ending for the group of companies, and subsequently closes its accounts on 30 September each year. The basis period for the Y/I 2005 is 15.01.2005 to 30.09.2005 30.09.2005 The basis period for the Y/I 2006 is 01.10.2005 to 30.09.2006 30.09.2006 . 4.5.6 Requirement Requirement under the law of place of incorporation Where an entity commences operations, and the law of the place where it is incorporated, requires it to close its accounts on a particular date; the period from the date of commencement to that accounting date date is the basis period for the first year of assessment. Example A company commences operations on 21.10.2004 and makes up its first accounts to 30.04.2005 as required by the law of the place of its incorporation. The basis period for the Y/I 2005 is 21.10.2004 to 30.04.2005. 30.04.2005. There is no basis period for period for the Y/I 2005 . 4.6 Change of accounting date 4.6.1 Normal accounts ending on 31 December Where accounts are normally closed on 31 December and there is a change of accounting date, the basis period in the year of change is the year ending 31 December. The basis period for the subsequent year of assessment will also be the year ending 31 December unless there is a 12 month accounting period ending ending in that year, in which case that accounting period will be the basis period. Thereafter, the 12 month accounting period will be the basis period. Example 1 An entity which normally closes its accounts on 31 December changes its accounting date to 30 September and prepares accounts as follows: 01.01.2005 to 30.09.2005, and subsequently to 30 September each year. The basis period for the Y/I 2005 is 01.01.2005 to 01.01.2005 to 31.12.2005 . The basis period for the Y/I 2006 is 01.10.2005 to 30.09.2006. 30.09.2006. Example 2 An entity which normally closes its accounts on 31 December changes its accounting date to 31 March and prepares accounts as follows: 01.01.2005 to 31.03.2006 and subsequently subsequently to 31 March each year.
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The basis period for the Y/I 2005 is 01.01.2005 to 31.12.2005. 31.12.2005. The basis period for the Y/I 2006 is 01.01.2006 to 01.01.2006 to 31.12.2006 . The basis period for the Y/I 2007 is 01.04.2006 to 31.03.2007. 31.03.2007. 4.6.2 Normal accounts not ending on 31 December and new accounts prepared for less than 12 months. A. New accounts ending in the following year The new accounting period is the basis period for the year of assessment in the failure year (see paragraph 4.6). Example An entity‟s accounts accounts are normally prepared ending on 30 September. The entity changes its accounting date and the accounts are now closed on 31 March. Accounts are prepared as follows: 01.10.2004 to 30.09.2005 (6 months), and to 31 March for subsequent subsequent years. The basis period for the Y/I 2005 (the failure year) is 01.10.2004 to 31.03.2005 31.03.2005 (6 months). The basis period for the Y/I 2006 is 01.04.2005 to 31.03.2006. 31.03.2006. B. New accounts and the last accounts ending in the same year The period comprising the new accounting period together with the following accounting period is the basis period for the year of assessment in the failure year. Example An entity‟s accounts are normally prepared ending on 30 June. The company changes its accounting date and the accounts are now closed on31 December. Accounts are prepared as follows: 01.07.2004 to 30.06.2005, 01.07.2005 to 31.12.2005 (6 months), 01.01.2006 to 31.12.2006 and to 31 December for subsequent years. Since both the new accounting period 01.07.2005 01.07.2005 to 31.12.2005 and the last accounting ac counting period 01.07.2004 01.07.2004 to 30.06.2005 end in the same basis year: The basis period for the Y/I 2006 (the failure fai lure year) is 01.07.2005 to 31.12.2006 31.12.2006 (18 months). The basis period for the Y/I 2007 is 01.01.2007 to 31.12.2007. 31.12.2007. 4.6.3 Normal accounts not ending on 31 December and new accounts prepared for more than 12 months A. New accounts ending in the following year The new accounting period is the basis period for the year of assessment in the failure year. Example An entity‟s accounts are normally prepared ending ending on 31 July. The entity changes its accounting date and accounts are now closed on 31 October. Accounts are prepared as follows: 01.08.2004 to 31.10.2005 (15 months), and to 31 October for subsequent years. The basis period for the Y/I 2005 is 01.08.2004 to 31.10.2005 (15 months). The basis period for the Y/I 2006 is 01.11.2005 to 31.10.2006. 31.10.2006. B. New accounts ending in the third year If the new accounting period spans 3 basis years, it is apportioned into 2 periods, and these 2 periods will be taken to be the basis periods for the first 2 years of assessment commencing commencing in the failure year.
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Example An entity‟s accounts are normally prepared ending on 30 November. There is failure to close accounts to its normal accounting date and accounts are prepared for a period of more than 12 months from 01.12.2004 to 28.02.2006 (15 months), and to 28 February for f or subsequent years. The accounting period 01.12.2004 to 28.02.2006 28.02.2006 (15 months) is apportioned into 2 periods, so that: The basis period for the Y/I 2005 (the failure fai lure year) is the period 01.12.2004 to 31.07.2005 (8 months). The basis period for the Y/I 2006 is the period 01.08.2005 to 28.02.2006 (7 months). (In determining the basis periods for the situations in paragraphs 4.6.2 and 4.6.3 above, no accounting period or year of assessment should be left out and there should be no overlapping of basis periods. Any fraction of a month should be treated as falling into the first period.) 4.7 Company joining a partnership If a company joins a partnership, the partnership will be regarded as a new operation of the company. The basis period for its existing operations is, therefore, also the basis period for the partnership source (see paragraph 4.5.4). Example 1 A company (whose accounts are closed on 30 June) joins a new partnership which commences business on 18.02.2005. The first accounts of the partnership are prepared to 30.09.2005 and accounts are subsequently prepared to 30 September September each year. yea r. Notwithstanding the accounting period of the partnership, the basis periods for the company in respect of its partnership source are: Y/I 2005:
18.02.2005 to 30.06.2005
Y/I 2006:
01.07.2005 to 30.06.2006
Example 2 A company (whose accounts are closed on 31 December) joins an existing partnership on 01.02.2005. The accounts of the partnership are normally made up to 31 March. The accounts for the partnership continue to be made up to 31.03.2005, and to 31 March for subsequent years. Notwithstanding the accounting period of the partnership, the basis period for the company in respect r espect of its partnership source for the Y/I 2005 is 01.02.2005 to 31.12.2005. 31.12.2005. Example 3 ABC Ltd. (whose accounts are closed on30 June) and D Ltd (whose accounts are closed on 30 September) start a joint venture. The accounts of the joint venture are made up as follows: 01.04.2005 to 31.12.2005 and to 31 December for subsequent years. Notwithstanding the accounting period of the partnership, the basis periods in respect of the partnership source are as follows:
Y/I
ABC Ltd
D Ltd
2005
01.04.2005 – 01.04.2005 – 30.06.2005
01.04.2005 – 30.09.2005 01.04.2005 –
2006
01.07.2005 – 01.07.2005 – 30.06.2006
01.10.2005 – 30.09.2006 01.10.2005 –
2007
01.07.2006 – 01.07.2006 – 30.06.2007
01.10.2006 – 30.09.2007 01.10.2006 –
(Note: In all the situations in Examples Examples 1, 2 and 3 above, above, the adjusted income from the partnership partnership source for the relevant accounting periods should be apportioned accordingly.)
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4.8 Treatment of adjusted income / adjusted loss in overlapping periods Where the application of paragraph 4.5.3 or paragraph 4.6.1 results in an overlapping of two basis periods (see Examples 1 & 2 in paragraph 4.5.3 and Examples 1 and 2 in paragraph 4.6.1), the adjusted income or adjusted loss common to both basis periods is ignored in the second basis period. Example An entity commences a business on 01.07.2005 and accounts are prepared as follows: 01.04.2006 to 31.03.2007, and subsequently to 31 March. The adjusted income of the company‟s business business is as follows: Accounting period Adjusted income 01.07.2005 to 31.03.2006 (A) shs.15,000m 01.04.2006 to 31.03.2007 (B) Shs.24,000m Applying paragraph 4.5.3, the basis periods for the entity the entity are: Y/I Basis periods 2005
01.07.2005 – 31.12.2005 (6 months)
2006
01.01.2006 – 31.12.2006 (12 months)*
2007
01.04.2006 – 31.03.2007 (12 months)*
(*Overlapping period: 01.04.2006 – 31.12.2006) The adjusted income of the business should be apportioned as follows: Y/I & Basis period
Apportionment Apportionment
2005 (01.07.2005 – (01.07.2005 – 31.12.2005)
01.07 – 01.07 – 31.12.2005: 31.12.2005: 6 / 9 x (A) (6 / 9 x Sh.15,000m.) Sh.15,000m.)
2006 (01.01.2006 – 31.12.2006)
01.01 – 31.03.2006: 31.03.2006: 3 / 9 x (A) (3 / 9 x Sh.15,000) 01.04 – 01.04 – 31.122006: 9 / 12 x (B) (9 / 12 x Sh.24,000)
2007 (01.04.2006 – (01.04.2006 – 31.03.2007)
Adjusted income
Adjusted income of overlapping period (01.04.2006 – 31.12.2007) ignored in second basis period: (Sh24,000m – (Sh24,000m – Sh.18,000m)
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Sh.10,000m sh.5,000m. sh.18,000m sh.23,000m
Sh6,000m
Practice Note No 02/2004 Date of Issue 15th December 2004 CAPITAL GAINS FROM REALISATION OF INTEREST IN LAND OR BUILDINGS 1.1 1.1
TAX LAW. This Practice Note applies in respect of the taxation of capital gains income derived in conducting an investment from realisation of an interest in land or buildings situated in the United Republic.
1.2 INTERPRETATION. In this Practice Note, unless the context requires otherwise “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act. 2.0
THE APPPLICATION OF THIS PRACTICE NOTE
This Practice Note considers: 2.1 Important features in determining whether or not a transaction is considered as realisation of an interest in land or building and capital gains, if any which arise from such transaction is liable to tax as such; 2.2 Exemptions; 2.3 Mode of computation and deductions; 2.4 Mode of taxation of capital gains; 2.5 Tax on capital gains in case of individuals; 2.6 Tax on capital gains in case of entities. HOW THE LAW APPLIES. 3.1 Realisation. A person who owns an interest in land or building shall be treated as realising the asset; (a) When the person parts with ownership of the interest including when the interest is sold, exchanged, transferred, distributed, distributed, cancelled, redeemed r edeemed,, destroyed or surrendered in the case of interest of a person who ceases to exist, excluding a deceased individual, immediately before the person ceases to exist. (b) In the case of interest owned by an entity at the moment the underlying ownership of an entity changes by more than fifty percent as compared with that ownership at the time during the previous three years except when for a period of two years after the change the entity:(i) conducts the business or where more than one business was conducted, all of the businesses that it conducted at any time during the twelve months period before the change and conducts them in the same manner as during the twelve months period; and 3.0
(ii) conducts no business or investment other than those conducted at any time during the twelve months period before the change. 3.2 Important features. 3.2.1 The provisions of of the Act of advance advance payment of of income tax by by quarterly instalments instalments do not not apply to tax on capital gains on realisation of interest in land or buildings. Where an instalment payer derives a gain in conducting an investment from the realisation of an interest in land or building situated in the United Uni ted Republic, the person shall pay income tax by way of single instalment. 3.2.2
The following transactions are are not considered considered as realisation realisation subject to capital gains gains income tax and capital gains, if any, which arise from such realisation are exempt from capital gains income tax.
(a) (b)
Distribution of the investment asset to its shareholders on its liquidation. Distribution of the investment asset on dissolution of a firm, body of individuals or association of persons.
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(c)
Any transfer in a scheme of amalgamation of an investment asset by the amalgamating company to the amalgamated company if the amalgamated company is a Tanzanian company.
3.2.3
The capital gains tax shall be paid before the title to the interest is transferred and the Registrar of Titles shall not register such a transfer without the production of a Certificate of the Commissioner certifying that the tax has been paid or that no tax is payable.
3.2.4
Where the interest is realised for inadequate consideration being less than the fair market value of the interest and the Commissioner has reason to believe that the realisation is effected with the object of avoiding or reducing the liability for payment of tax under capital gains, the Commissioner may adopt the fair market value of the interest intere st against the value declared by the instalment payer.
Exemptions 3.3.1 Realisation of a private residence. Where a private residence of an individual is realised the capital gain arising as a result of the realisation of such residence is not to be included in the capital gains income provided the following conditions are fulfilled: 3.3
(a) (b)
The residence has been owned continuously by the individual for three years or more and lived in by the individual continuously continuously or intermittently for a total of three years or more; and The interest was realised for a gain of not more than shillings 15,000,000.
3.3.2 Realisation of interest in land la nd used for agricultural purposes. Where interest in land held held by an individual individual that has market value of less less than shillings 10,000,000 10,000,000 at the time it is realised and has been used for agricultural purposes for at least two of the three years prior to realisation, the gain, if any, which arise from the transaction is not to be included in capital gains income. 3.4 Mode of computation of capital gains. Capital gains income is calculated as follows:From the full value of consideration received or accruing as a result of the realisation of the interest in land or buildings, the following amounts amounts shall be deducted to arrive at the amount amou nt of the gains: (a) (b) (c)
The cost of acquisition of the interest The expenditure incurred on any improvement improvement to the asset Expenditure incurred wholly and exclusively in connection with the realisation, such as stamp duty, registration charges, legal fees, brokerage etc.
3.5 Mode of taxation. For years of income commencing on or after 1 July, 2004 the income chargeable under capital gains is to be included in the person‟s gross total income for the year of income, where the person is required under the Act to file a return of income. 3.6 Tax on capital gains in case of individuals. 3.6.1 An individual instalment payer who derives capital gains shall pay income tax equal to (a) in the case of a resident r esident individual, ten percent of the gain, or (b) in the case of a non-resident individual, twenty percent of the gain. 3.6.2
In the case of a resident individual who derives a capital gain in realisation of interest in land or building the individual shall pay tax as follows:-
(a) the greater of – – (i) the individual‟s total income less the gains; gai ns; or (ii) shs. 720,000/=
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shall be taxed at the specified individual resident income tax rates as though it was the only total income of the individual; and (b) the balance of the total income shall be taxed at the rate of 10 percent. Example 1 Mr. Y was resident during the year 2004. He sold his personal building which was not used for his residence for shs. 40,000,000/=. The building was acquired for shs. 15,000,000/= four years back on which he spent shs. shs . 3,000,000 /= on improvement and shs. 1,500,000/= in connection with the sale of the house. Mr. Y also had business income of shs. 16,000,000/= 16,000,000/= during the year. Capital gains tax computation Business income Capital gains: Sale sh. 40,000,000 Less: Cost 15,000,000 Expenses 1,500,000 16,500,000 Total income
shs. 16,000,000
23,500,000 shs. 39,500,000
Tax to be computed on Total income shs. 39,500,000 Less gain “ 23,500,000 Other income shs. 16,000,000 Shs. 16,000,000/= to be taxed at individual indivi dual resident tax rates Capital gains shs. 23,500,000 at 10 percent i.e. capital gains tax shs. shs. 2,350,000/=. Example 2. Mr. M a resident individual realised gross receipt of shs. 4,000,000/= which he acquired three years back for shs. 1,000,000/=. Mr. M incurred no expenditure on improvement and the sale and had no other income during the year. Capital gains tax computation Receipts on realisation shs. Cost of acquisition “ Capital gains shs. Other income Total income shs. Less shs. 720,000 (threshold) Taxable gains Tax at 10% rate shs.
4,000,000 1,000,000 3,000,000 NIL 3,000,000 720,000 2,280,000 228,000
Example 3 If Mr. N was non-resident during the year the capital gains tax would be computed as follows: Gross gains Less cost Capital gains Tax at 20%
shs. shs. shs.
4,000,000 1,000,000 3,000,000 600,000
Example 4 If Mr. Z realized the interest in his house, which he acquired for shs. 1,000,000 the previous year, for shs. 1,800,000 and during the year he had business loss of shs. 1,000,000/=. Mr. Z had unrelieved capital loss of shs. 10,000 from his realization of interest in land the previous year.
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The Capital gains will computed as follows:Business loss shs. (1,000,000) Capital gains Receipts shs. 1,600,000 Less cost “ 1,000,000 shs. 600,000 Capital gains tax
Income shs. Less capital loss Less threshold Taxable gains
800,000 “ 10,000 shs. 790,000 “ 720,000 shs. 70,000
Capital gains gains tax at 10% shs. 7,000/= Note: Business loss is not deductible deductible against capital gains; only capital loss is deductible against capital gains. 4.7 Tax on capital gains in case of entities. Capital gains income of entities is charged to tax at the rates of 10 percent for residents and 20 percent for non-residents of the gains amount.
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Practice Note No. 03/2004 03/2004 th Date of Issue 15 December 2004 CHARITABLE ORGANISATIONS OR RELIGIOUS ORGANISATIONS 1.0TAX LAW. This Practice Note applies in respect of the taxation of income of charitable organisation or a religious organisation from charitable businesses. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise “Act” means the Income Tax Ta x Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act. 3.0
THE APPPLICATION OF THIS PRACTICE NOTE
This Practice Note considers: 3.1
A charitable organisation or religious organisation conducting a business with respect to its functions referred to as the “charitable business”;
3.2
Income of a charitable organisation or religious organisation exempt from income tax and conditions;
3.3
Accumulation of income and conditions;
3.4
Exemption of Capital Gains;
3.5
Exemption of gifts, bequests etc.
3.6
Income of a charitable chari table organisation or religious organisation that ceases to be charitable chari table or religious organisation during a year of income. in come.
HOW THE LAW APPLIES. 4.1 Charitable status An organisation has charitable status if it meets the following conditions: 4.0
(a) (b)
(c)
4.2
4.2.1
It is resident in Tanzania and of public character It was established and functions solely as an organisation for the relief of poverty or distress of the public, for advancement of education, or the provision of general public health, education, water or road construction or maintenance. It has been issued with a ruling by the Commissioner under the Act stating that it is a charitable organisation. Calculating income from charitable business The income of a charitable organisation or religious organisation shall be treated as conducting a business with respect to the function of the organisation which is referred to as the “charitable business”. business”.
4.2.2
The income of a charitable organisation or religious organisation from the charitable business is calculated as follows:-
(a)
there shall be included together with any other amounts required to be included in calculating income under the Act, all gifts and donations received by the organisation; and there shall be deducted, together with any other amounts deductible deductible under the Act – Act –
(b)
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i)
amounts applied in pursuit of the organisations functions by providing reasonable benefits to resident persons or persons resident any where if the expenditure has a source in the United Republic; and
ii)
25 percent of the organisation‟s income from its charitable business calculated without deduction of the amounts applied in pursuit of its functions and any investment.
4.2.3
Offsetting losses between charitable and non-charitable business is not allowed that is, it is not allowed to set off losses from charitable business against income from non-charitable business.
4.3 4.3.1
Income exempt from tax and conditions The income of a charitable or religious organisation from its charitable business is exempt from income tax provided that at least 75 percent of its income is applied in pursuit of the organisation functions.
4.3.2
Where a charitable organisation or religious organisation wishes to save funds for a project that is detailed in material particulars and which the organisation is committed to the organisation may apply to the Commissioner and the Commissioner may approve the saving as meeting the application in pursuit of the organisation‟s organisation‟s functions functions during the year of income.
Example Suppose the income of a trust from a property held for charitable or religious purposes is Tshs. 15,000,000/=. Besides the trust has received Tshs. 4,000,000/= by way of voluntary contributions. It is assumed that the income applied for the purposes of the trust is Tshs. 10,000,000/=. The tax liability of the organisation will be:Income from property held Voluntary contributions deemed income Under section 64(2)(a)
Tshs. 15,000,000 Tshs. 4,000,000 Tshs. 19,000,000
Less income applied for the purpose of the organisation Tshs. 10,000,000 Unapplied income Tshs. 9,000,000 The maximum non-application of income admissible is 25 percent of the total income of the organization (Viz. Tshs. 19,000,000) which will be Tshs 4,750,000. The balance of unapplied income of shs. 4,250,000 (Tshs. 9,000,000 – 9,000,000 – 4,750,000) will be liable to tax during the year of income. 4.4 Accumulation of income and conditions Accumulation or saving of funds of a charitable organization or religious organization for a project that is detailed in material particulars of the trust income for future application to the charitable functions of the organization is acceptable subject to the approval of the Commissioner. The amount will not attract tax liability. If in any year of income the accumulated income is applied to purposes other than charitable or religious purposes or ceases to be set apart or saved for application to such purposes, it will be subjected to tax as income for that year of income. 4.5 Exemption of capital gains On sale of an investment asset of a charitable organisation or religious organisation and investing the net consideration (i.e the sale proceeds as reduced by any expenditure incurred in the acquisition of the asset and wholly and exclusively in connection with the sale) in another investment asset, then the capital gains equivalent to the reinvestment in the new asset shall be deemed to have been applied to charitable purposes and will therefore be tax exempt. exem pt. 4.6 Exemption of gifts, bequest, donations, alms etc. Gifts, bequests, donations, alms etc. given to a charitable organisation or religious organisation and applied in pursuit of the charitable or religious functions are not taxable on the or ganisation.
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Donations and gifts applied towards business shall be included in calculating the business income of the organisation but shall shall be deducted deducted if applied in pursuit pursuit of the charitable charitable or religious functions. functions. Gifts, donations, alms, sadaka etc to a place of worship or for religious functions are not taxable on religious organisations. 4.7 4.7.1
4.7.2
Income of a charitable organization or religious organization which ceases to be a charitable or religious organization during a year of income Where a charitable organisation or religious organisation ceases to be a charitable or religious organisation during a year of income the charitable organisation or religious organisation shall be treated as conducting a business other than its previous charitable business. The organisation organisation after the cessation will include in calculating the organisation‟s income for the year of income from business any amounts claimed as a deduction when calculating the income from charitable business as provided for under section 64(2)(b)(ii) of the Act, that is, the retained 25 percent of the charitable business income and any investment income during that year of income or any prior year of income during which the orga organisation nisation was a charitable or religious religious organisation.
Example M/S A Trust, a charitable organisation, was established in Tanzania in the year 01. During the year 01 it had income of Tshs. 15,000,000/= 15,000,000/ = of which Shs. 12,000,000/= 12,000,000/ = was applied toward the functions of the organisation. Since Since the balance of the income income of shs. 3,000,000 3,000,000 was less than 25 percent of of the total income the amount was not taxed. During the year 02 the organisation derived taxable income of Tshs. 25,000,000/= of which Tshs. 10,000,000 was applied towards its functions. The organisation applied to the Commissioner to be allowed to save shs. 9,000,000/= to be applied towards its functions in the year 03. The Commissioner Commissioner allowed allowed the the saving of the amount. The balance balance of shs. 6,000,000 6,000,000 which is, shs. 25,000,000 less (shs. 10,000,000 + 9,000,000), 9,000,000) , being 24% of shs. 25,000,000 was was not taxed. The organisation ceased to be a charitable organisation in the year 03 before applying to its functions the amount of Tshs. 9,000,000 saved from its charitable business in the year 02. The taxable income of the organisation organisation for the year 03 when it ceased to be be a charitable organisation organisation is calculated as follows: Income from its business business in year 03 shs. Add: Exempt amount in year 01 - shs. 3,000,000 Exempt amount in year 02 - shs. 6,000,000 Saved amount in year 02 - shs. 9,000,000 Taxable income of the organisation for the year of income 03 is shs.
16,000,000
18,000,000 34,000,000
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Practice Note No 04/2004 Date of Issue 15th December 2004 INCOME FROM BUSINESS 1.0TAX LAW. This Practice Note applies in i n respect of the taxation of income from business. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise – otherwise – “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act. 3.0 THE APPLICATION OF THIS PRACTICE NOTE. This Practice Note considers: 3.1 Activities constituting business. 3.2
Receipts deemed to be gains or profits from a business.
3.3
Claim of right to derive income or incur an expenditure
3.4
Reverse of amounts
3.5
Deductions from business income.
3.6
Amounts not deductible from business income.
3.7
Capital gains and losses.
3.8
Carry forward of losses.
3.9
Donations.
4.0 HOW THE LAW APPLIES. 4.1 Activities constituting conducting conducting a business. “Business” includes a trade, concern in the nature of trade, manufacture, profession, vocation or isolated arrangement with a business character; and a past, present or prospective business, but excludes employment and any activity that having its nature and the principal occupation occupation of its owners or underlying owners, is not carried on with a view to deriving profits. Income from business is calculated as follows: Amounts derived from conducting the business Deduct any payments which have been subjected to a final withholding tax. Deduct depreciation allowance Deduct or Add depreciation balancing adjustments Deduct trading stock allowance Add net capital gains (after deducting capital losses) Deduct any loss carry forward from previous year Deduct donations. 4.2 Receipts deemed to be gains or profits from a business Amount treated as gains or profits from a business is the total amount coming into the business for sale of goods and services (including sale of trading stock) stock) and any other amount derived in doing business. In calculating the profits from any business the following amounts are included – included –
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(a) (b) (c) (d) (e) (f) (g)
Service fees. Incoming for trading stock. Gains from realisation of business assets or liabilities. Excess amounts derived in realisation of depreciable assets. Amounts derived as consideration for accepting a restruction on the capacity to conduct the business. Gifts and ex gratia payments gratia payments received by the person in respect of the business. Amounts derived that are effectively connected with the business that would otherwise be included in calculating the person‟s income from investment.
The following receipts are excluded from calculating business income – income – (a) exempt amounts and final withholding payments. payments. (b) amounts that are included in calculating the person‟s income from any employment. 4.3 Claim of right to derive income or incur an a n expenditure For the purposes of accounting for income tax purposes an amount shall be treated as derived or expenditure incurred by a person notwithstanding that the person is not legally entitled to receive the amount or liable to make the payment. So long as the person claims to be legally entitled to receive or legally obliged to pay the amount. 4.4 Reverse of amounts Where a person has deducted expenditure expenditure in calculating the person‟s income and the person later recovers the expenditure, the person shall, at the time of recovery, include the amount recovered in calculating the person‟s income. Such reversals include:include:
Where a person has included an amount in calculating the person‟s income but because of the legal obligation to do so, the person later refunds the amount, the person may deduct the amount at the time of refund. Where in calculating income on accrual basis a person deducts expenditure that the person shall be obliged to make and the person later disclaims an obligation to incur the expenditure the person shall, at the time of disclaimer, include the amount disclaimed in calculating the person‟s income. Where in calculating income on an accrual basis a person includes an amount to which the person is entitled and the person later disclaims an entitlement to receive the amount or in the case of a bad debt claim of the person, the person writes off the debt as bad the person may, at the time of disclaimer or write off, deduct the amount.
4.5 (a)
Deductions from business income. Business expenditure is deductable only when any business is carried on by the person at any time during the year of income.
(b)
For the purposes of calculating calculating a person‟s income from business for any year of income no deduction shall be allowed for – for – consumption expenditure excluded expenditure expenditure incurred by the person in deriving exempt amounts or final withholding payments distributions by an entity.
i) ii) iii) iv) (c)
For the purposes of calculating a person‟s income for a year of income from a business, there shall be deducted all expenditure incurred during the year of income by the person, wholly and exclusively in the production of the income.
For calculating the income from business, the following deductions are allowable – allowable –
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i)
Interest expense. Interest incurred by a person during a year of income under a debt obligation shall be treated as incurred wholly and exclusively in the production of income from a business if the debt obligation was incurred in borrowing money employed in the business or to acquire an asset that is employed during the year of income in the production production of the income. In any other case, the debt obligation was incurred wholly and exclusively in the production of the business income. The total amount of interest that an exempt controlled resident entity may deduct for a year of income shall not exceed the sum of all interest derived by the entity during the year of income that is to be included included in the entity‟s total income and 70 percent of the entity‟s total income for the year calculated without including any interest derived or deducting any interest incurred by the entity.
Example 1
An exempt-controlled resident company, M Ltd received during year 2004 business income of Tshs. 6,000,000 including interest of Tshs. 4,000,000. During the year it incurred interest expenditure of Tshs. 5,000,000. The allowable interest expenditure for the year 2004 is calculated as follows:Total business income for the year of income Less interest derived amount (4,000,000) and interest incurred 5,000,000 “ Balance 70% of the balance Add:Interest received
shs.
6,000,000 “ 1,000,000 shs. 7,000,000 shs. 4,900,000 4,000,000
Maximum allowable expense
shs.
8,900,000
Since the maximum allowable interest expense is sh. 8,900,000/= the whole interest expenditure amount of shs. 5,000,000 can be allowed as a deduction in the year 2004. Example 2 An exempt controlled company K Ltd made during the year business profit of shs. 4,000,000 after deducting interest payment of shs. 3,500,000 and inclusive of interest receipt of shs. 1,000,000. Ltd’s maximum allowable interest expense is calculated as follows:-
Taxable income/(loss) income/(loss) Less Interest earned (1,000,000) Interest incurred 3,500,000 70% of the rest of the income
shs.
4,000,000
shs. shs. shs.
2,500,000 1,500,000 1,050,000
Maximum allowable interest expense is calculated a s follows:
Interest derived during the year 70 percent of company's other income Maximum allowable interest expense
shs. shs. shs.
1,000,000 1,050,000 2,050,000
K Ltd’s income is adjusted as follows:
Income declared Add interest incurred Less maximum interest inter est expense Adjusted income for the year Interest carry forward to following year Total interest incurred Less expensed during the year Carry forward interest
shs.
4,000,000 shs. 3,500,000 shs. 7,500,000 shs. 2,050,000 shs. 5,450,000
shs. shs. shs.
3,500,000 2,050,000 1,450,000
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The interest amount of shs. 1,450,000 denied deduction during the year may be carried forward and treated as i ncurred during the next year of income.
ii) Trading Stock Allowance. Allowance. For calculating a person‟s business income for a year of income there shall be deducted trading stock allowance. The allowance is calculated as: The opening value of trading stock of the business for the year of income Add expenditure incurred by the person person during the year that is enacted in the cost of the trading trading stock. Deduct the closing value of the trading stock of the business for the year of income. The closing value of trading stock of a business business for a year of income shall shall be the lower of the cost of the trading stock of the business at the end of the year of income OR the market value of the trading stock of the business at the end of the year. When the closing value of the trading stock is determined on the basis of the market value the cost of the trading stock shall be reset to that value. Example The trading stock position of company J Ltd as at the end of the year of income is shown in the Trading Account as follows: Opening Stock Purchases and cost‟s Closing stock Cost of sales
shs. “ shs. “ shs.
15,000,000 60,000,000 75,000,000 30,000,000 45,000,000
However, at the end of the year the market value of the stock is determined to be shs. 22,000,000. J Ltd‟s trading stock allowance is determined as follows: Original trading stock allowance Opening stock Add Purchases and cost Less Closing stock Trading stock allowance
shs. “ shs. shs. shs.
15,000,000 60,000,000 75,000,000 30,000,000 45,000,000
Revised trading stock allowance Since the closing stock value is adjusted at market value the adjusted stock allowance is reset as: Opening stock value Add Purchases and cost Less revalued closing stock Adjusted Adjuste d Trading Tradin g Stock allowance
shs. “ shs. shs. shs.
15,000,000 60,000,000 75,000,000 22,000,000 53,000,000 53,0 00,000
The trading stock allowance for the year of income is taken as shs. 53,000,000 and not shs. 45,000,000. Note that the opening stock value for the next year of income will now be shs. 22,000,000 and not shs. 30,000,000. iii)
Repair and Maintenance expenditure. expenditure.
For the purposes of calculating a person’s income for a year of income from any business, these shall be calculated all expenditure to the extent incurred deriving the year of income by the person and in respect of the repair and
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maintenance of depreciable assets owned and employed by the person wholly and exclusively in the production of the person’s income from the business. Note that no deduction shall be allowed for expenditure in improving an asset, which may be included in the cost of the asset and allowed either in calculating gains or losses on realisation or depreciation allowances.
iv) Agriculture, Agriculture, research, r esearch, development and environmental environmental expenditures. For the purposes of calculating a person‟s income from business for any year of income expenditure on agricultural improvement, research and development and environmental expenditure expenditure to the extent incurred wholly and exclusively in the production of the income from the business shall be allowed. Agricultural improvement expenditure expenditure For the purposes of the deduction “agricultural improvement expenditure” means expenditure incurred by the owner or occupier of farm land in conducting agriculture, livestock farming or fish farming business where the expenditure is incurred on clearing the land and excavating irrigation channels or planting perennial crops or trees bearing crops. Environmental expenditure “Environmental expenditure” means expenditure incurred by the owner of farmland for the privention of soil erosion or in connection with newdying any damage caused by natural resource extraction operations to the surface of or environment on land. Where in conducting a resource extraction business a person makes a provision for any expenditure in connection with remedying any damage caused by the resource extraction the Commissioner may, in writing, subject to such terms and conditions as the Commissioner thinks and for the purpose purpose of the deduction deduction only, treat the provision provision as environmental environmental expenditure expenditure incurred in conducting conducting the business. Research and development development expenditure expenditure “Research and development expenditure” means expenditure incurred in the process of developing the person‟s business and improving business products or process and includes expenditure incurred by a company for the purposes of an initial public offer and first listing on the Dar es Salaam Stock Exchange. However, the expenditure excludes any expenditure incurred that is otherwise included in the cost of any asset used in any such process, including an asset consisting expenditure incurred by a person in the person‟s business in respect of natural resource prospecting, exploration and development. Terms and conditions for Commissioner‟s Commissioner‟s approval of a provision for environmental expenditure In approving a provision for environmental expenditure to be allowed as a deduction incurred a person the Commissioner shall specify a date by which the expenditure must be incurred by the person, which date shall not be more than two years after the date by which resource extraction has substantially ceased. ceased. Where the Commissioner approves the provision and the person does not incur the expenditure by the specified time the Commissioner shall adjust any assessment of the person so as to remove the deduction, which adjustment will be made irrespective of the time limit for f or making an assessment. The person shall be liable for interest for under estimating the tax payable by instalment and interest for failure to pay tax. The person shall also be liable for penalty for making false or misleading statement calculated as though the person made, without reasonable excuse, a statement to the Commissioner in claiming the deduction that was false or misleading in a material particular. v) Gifts to public and charitable institutions. For the purposes of calculating income from a business amounts contributed during the year of i ncome to a charitable institution or social development project or deduction made under section 12 of the Education Fund Act, 2001 shall be deducted. The available deduction in respect of a deduction other than a donation made under the Education Fund Act, 2001, shall be capped at 2 percent of the person‟s income from business calculated without the deduction. vi) Depreciation Allowances for Depreciable Assets. Depreciation Allowances are allowed in respect of depreciable assets. A depreciable asset is an asset employed wholly and exclusively in the production of income of a business, which was or benefit to the business lasting more than one year, and which is likely to lose value because of wear and tear, 18
obsolescence or the passing of time. Land, shares and trading stock are excluded. Depreciable assets include machinery, vehicles, equipment, buildings, frameworks and legal rights which expire (leases, franchise). When a person purchases and starts using a depreciable asset, or makes an improvement to a depreciable asset, the person cannot deduct the full amount of the expenditure in the first year, except for agriculture and mining business assets, but can deduct portions of the expenditure for a number of years until the full expenditure has been deducted. deducted. The deduction system can be straight line method or reducing balance method. The conditions for entitlement of depreciation allowances deduction are that the asset should be owned by the person and the asset should actually be used wholly and exclusively in the production of the income. vii) Losses on realisation of business assets and liabilities. lia bilities. In calculating a person‟s income for any year of income from any business from the following realisations shall be allowed – allowed –
Business asset of the business that was employed wholly and exclusively in the production of the income from the business; a debt obligation incurred in borrowing money which was employed or an asset purchased with the money is or was employed wholly and exclusively in the production of the income; or a liability of the business other than a debt obligation incurred is borrowing money, where the liability was incurred wholly and exclusively in the production of the income from the business.
viii) Losses from a business. For calculating the income of a person from business other than the income of a partnership or a foreign permanent establishment, any unrelieved loss of the year of income of the person from any other business and any unrelieved loss of a previous year of income of the person from business shall be deducted. Foreign source losses shall be deducted only in calculating the person‟s foreign source income. Where a person calculates income for a year of income from more than one business of the person and deducts an unrelieved loss in more than one such calculation, the person may choose the calculation or calculations in which the loss or part of the loss is deducted. deducted. ix) Capital losses. Capital losses are calculated for other “business assets”. Other “business assets” are assets which are used as part of a person‟s business but are not trading stock and they are not depreciable assets. The following assets are excluded from business assets and are therefore not liable for inclusion in capital loss calculations:
If a trading individual, an interest in land that has a market value of less than shillings 10 million at the time it is sold and that has been used for agricultural purposes for at least two of the three years prior to sale. In case of a resident corporation, shares in another resident corporation in which the first resident corporation holds more than 25 percent of the shares. Shares and securities listed on the Dar es Salaam Stock Exchange.
Capital losses may be made when a person realises (sells) an asset. When a person makes a capital loss from the sale of other business assets the person may deduct the loss from the person‟s income from business.
19
x) Carry forward losses. If a person made a loss from the th e person‟s business in the previous year, the loss can be carried forward and deducted from the current year‟s business income. Losses can be carried forward this year from year to year indefinitely. However loss carry forward is subject to the following limitations:l imitations:(a) Limits on losses of corporations If a corporation is sold (at least 50% of the underlying ownership changes) than losses made by it before the sale cannot be used to offset its income after the sale. The exception is where for a period of two years after the change the corporation conducts no business other than that conducted at any time during the twelve month period before the change. (b) Limits on capital losses If a corporation makes a loss when selling a business asset, it can offset only gains from selling other business assets. (c) Foreign losses Foreign business losses can offset only foreign business income, losses on the sale of foreign business assets can offset only gains on sale of foreign business assets. Example. A corporation C Ltd made during the year of income 01 investment loss of sh. 1,200,000 and business loss of Tsh. 2,800,000. During the year 02 the corporation made Investment gain of shs. 4,200,000 and business profits of sh. 2,000,000. The corporation‟s taxable income from business b usiness and investment in year 02 will be calculated as follows:Investment income
Investment gain Less Loss carry carry forward from year 01 Net gain
shs. “ shs.
4,200,000 1,200,000 3,000,000
Business income
Profit from business shs. 2,000,000 Business loss carried forward “ (2,800,000) Net business loss carry forward to year 03 shs. (800,000) xi) Bad debt Deduction is allowed for the purposes of calculating income of a person from any business in respect of any debt or part thereof which has become bad or irrecoverable during the year of income subject to the following conditions.
In the case of a debt claim of a financial institution, only after the claim has become bad debt as determined in accordance with the relevant standards established by the Bank of Tanzania. In any other case, only after the person has taken all reasonable steps in pursuing payment and the person reasonably believes that the debt claim will not be satisfied. The debt must have been included in cluded in calculating the person‟s income for the year of income. The debt must have been written off as irrecoverable in the books of accounts of the person for that year of income in which the debt is claimed to have h ave become bad.
Taxable income of C Ltd for the year 02 is as follows:Investment income shs. 3,000,000 Business loss “ 800,000 C Ltd will pay tax on investment profits of shs. 3,000,000 and carry forward business loss of shs. 800,000 800,000 to year 03.
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Practice Note No 05/2004 Date of Issue 15th December 2004 INCOME FROM INVESTMENT FOR CORPORATIONS 1.0 TAX LAW. This Practice Note applies in respect of the taxation of income of corporations from conducting an investment. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise – otherwise – “Act” mans the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as have in the Act. 3.0 THE APPLICATION OF THIS PRACTICE NOTE. This Practice Note considers: 3.1
What constitutes investment income.
3.2
Returns on investment.
3.3
Payments subject to final withholding tax and exempt dividends.
3.4
Current expenses.
3.5
Capital gains and losses.
3.6
Carry forward of losses.
4.0 HOW THE LAW APPLIES. 4.1 Investment income A corporation‟s income from investment is its income from activities not directly related to its business. This class of income may include dividends, interest and rent which are not core to the business of a corporation. Income from investments is calculated as follows: From total returns on investment Deduct any income which has been subject to a final withholding tax and exempt dividends. Deduct
current expenses deductions. deductions.
Add net capital gains (i.e. capital gains minus capital losses) Deduct any loss carry forward from previous year. 4.2 Returns on investments Returns on investments include dividends, interest and rent, Note, the amount derived from sale of investment assets subject to capital gains, i.e sale of interest in land or buildings, is not included i ncluded here. 4.3 Payments subject to final withholding tax and a nd exempt dividends. Usually dividends distributed by a resident corporation shall be taxed in the hands of the corporation‟s shareholders in the form of a final withholding tax, whereby the paying corporation withholds tax from the dividend and remits the tax to the Commissioner for Income Tax. The dividend subjected to the final
21
withholding can be excluded from calculation of income from investment as the total tax liability of that income has already been satisfied. Where the shareholding of a resident corporation in another resident corporation distributing the dividend is 25 percent or more and controls either directly or indirectly, 25 percent or more of the voting power in the corporation the dividend is exempt from income tax and therefore there is not liable to withholding tax and the dividend amount is not included in calculating investment income of the shareholder corporation. corporation. 4.4 Current expenses Expenses (other than capital expenses) may be deducted only if i f they are incurred wholly and exclusively in the production of the income from the investment. Capital expenses are expenses, which derive benefit of more than one year, and these are not deductible. In calculating income from an investment for any year of income a corporation cannot deduct any expenses incurred in deriving final withholding payments or exempt income.
4.5 Capital gains and losses Capital gains and losses are calculated on the sale or realisation of investment assets. The following assets are excluded from calculations for capital gains and capital losses: (a) (b) (c)
The beneficial interest of a beneficiary in a resident trust Shares in a resident corporation if the corporation is resident and holds 25 percent or more of the shares in it and controls 25 percent or more of the voting power in the corporation. Shares and securities listed on the Dar es Salaam Stock Exchange.
Capital gains or loss is generally the market value at the time of the sale minus the total cost (including purchase/production costs and maintenance and repair costs if not deducted elsewhere). Add up all the corporation‟s capital gains for the year and deduct all the capital losses, including any unrelieved losses of a previous year. The net amount, if positive, is added to the corporation‟s income from investment. If negative the amount is carried forward to subsequent year of income. 4.6 Carry-forward Carry-forward losses If a corporation made a loss from investment in the previous year, the loss can be carried forward and deducted from the corporation‟s current year investment income. Losses can be carried forward this way from year to year indefinitely. However loss carry forward is subject to the following limitations:(d) Limits on losses of corporations If a corporation is sold (at least 50% of the underlying ownership changes) than losses made by it before the sale cannot be used to offset its income after the sale. The exception is where for a period of two years after the change the corporation conducts no investment other than that conducted at any time during the twelve month period before the change. (e) Limits on investment losses If a corporation makes a loss from any investment it can offset income from other investments and it cannot offset income from any business. (f) Limits on capital gains If a corporation makes a loss when selling an investment asset, it can offset only gains from selling other investment assets. (g) Foreign losses Foreign investment losses can offset only foreign investment income, losses on the sale of foreign investment assets can offset only gains on sale of foreign investment assets. Example. A corporation C Ltd made during the year of income 01 business loss of sh. 1,200,000 and investment loss of Tsh. 2,800,000. During the year 02 the corporation made business profit of shs. 4,200,000 and
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Investment of sh. 3,000,000. The corporation‟s taxable income from business and investment in year 02 will be calculated as follows:fol lows:Business income
Business profits Less Loss carry carry forward from year 01 Net profit
shs. “ shs.
4,200,000 1,200,000 3,000,000
Investment income
Gains from Investment Investment loss carried forward Net loss carry forward to year 03
shs. 1,000,000 “ (2,800,000) shs. (800,000)
Taxable income of C Ltd for the year 02 is i s as follows:Business income shs. 3,000,000 Investment loss “ 800,000 C Ltd will pay tax on business profits of shs. 3,000,000 and carry forward investment loss of shs. 800,000 800,000 to year 03.
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Practice Note No 06/2004 06/2004 th Date of Issue 15 December/2004 KEEPING SUFFICIENT RECORDS (ENTITIES) 1.0
TAX LAW
This Practice Note applies in respect of section 80 of the Income Tax Act, 2004. They are effective for the year of income i ncome 2004 and subsequent years of income. 2.0 2.1
INTERPRETATION In this Practice Note, unless context requires otherwise „Act‟ means the Income Tax Act, 2004. “Records” include: (i) books of accounts recording receipts and payments or income and expenditure; (ii) invoices, vouchers, receipts and such other documents as are necessary to verify the entries in any books of account; and (iii) any other records as may be prescribed by the Commissioner “Operations” include an activity which consists of:of:(i) the conducting of a business; (ii) the conducting of investment, (iii) both the conducting of a business and investment; or (iv) Conducting investment prior to the commencement of conducting of a business or the cessation of a business. “Persons responsible” include the manager or other principal officer in the United Republic, Republic, the directors the secretary and any person (however styled) exercising the functions of any of her persons mentioned earlier.
2.2
Definitions and expressions used in this Note which are used in the Act have, unless the context requires otherwise the same meaning in this Practice Note as they have in the Act.
3.0
THE APPLICATION APPLICATION OF THIS PRACTICE NOTE
This Practice Note considers: 3.1
what constitutes sufficient records that an entity needs to keep; and
3.2
the consequences of failing to keep sufficient records.
4.0
HOW THE TAX LAW APPLIES
4.1
An entity is required under the Act to keep and retain in safe custody sufficient records to enable the income or loss of the entity for the basis period for any year of income be readily ascertained.
4.2
This Practice Note gives general guidelines on the records [see paragraph 2.1] that are to be retained for the purpose of income tax.
4.3
Records and books of account
4.3.1 General requirements Unless otherwise authorised by the Commissioner by notice in writing, every person liable to income tax shall maintain in the United Republic documents that are necessary to explain information to be provided in 24
a return or any other document to be filed with the Commissioner. However However Commissioner may, by service of a notice in writing require any person, whether liable to tax or not, to retain documents described with reasonable certainty in the notice. An entity must keep records including a cash book, a sales ledger, a purchases ledger and a general ledger. The type of books of account that should be kept will depend on the nature and the size of the business or operations [see paragraph 2.2]. The following requirements should be complied with: A.
The books of account should be written up at regular intervals. Appropriate entries for each transaction should be recorded as soon as possible (in any case not later than 30 days after the transaction).
B.
Supporting documents such as invoices, bank statements, pay-in slips, cheque buts, receipts for payments, payroll records and copies of receipts issued should be retained.
C.
Where any person receives a payment of an amount of one thousand shillings or more from the sale of goods or performance of service other than as an employee, the person shall issue a receipt to the person making the payment. The receipts must be serially numbered.
D.
A valuation of the stock in trade or work in progress should be made at the end of each accounting period and the appropriate records maintained.
4.3.2 Sufficiency of records Records in manual or electronic form should be sufficient to explain each transaction and to enable a true and fair profit and loss account and balance sheet to be prepared. 4.3.3 Records maintained in electronic form If computers are used to record the transactions, original source documents such as invoices and receipts should be retained in their original form. Where the original documents are in electronic form, the documents can be retained in such form. However, the records should be kept in an electronically readable form and in such manner as to enable the records to be readily accessible and convertible into writing. 4.3.4 Place for keeping records Records that relate to any business or operations in the United Republic must be kept at the registered office or the business premises of the entity in the United Republic. If records for operations outside the United Republic are kept outside the United Republic, the records should be produced at the registered office or the business premises premises in the United Republic, when requested by the Commissioner. 4.3.5 Period for keeping records A.
Except where subparagraph B or C below applies, records are to be retained for at least 5 years from the end of the year to which any income from the business or operations relates.
Example The financial year of an entity is the year ending 30.06.2005 The records of the entity for the financial year ending 30.06.2005 should be retained until 31.12.2010 [i.e. 5 years from the end of 2005 (the year to which the records relate)]. B.
If the return for a year of income is not furnished furnished within the time specified under the Act, the the relevant records are to be retained for a period of 5 years from the end of the year in which the return is furnished.
Example The financial year of a an entity is the year ending 31.03.2005. The entity fails to furnish its return for the Y/I 2005 by 30.09.2005 as required under un der the Act. The return is i s furnished on 23.05.2006.
25
The records of the company for the financial year ending 31.03.2005 should be retained until 31.03.2011 [i.e. 5 years from the end of 2006 (the year in which the return is furnished), and not from the end of 2005 (the year to which the records relate)]. C.
Where there is an appeal against an assessment, the relevant records are to be retained until the appeal is finally determined.
4.3.6 Records to be kept in the official language Records should be written in the official language. If the records are written in a language other than the official language, a written translation is to be provided, at the expense of the entity when requested by the Commissioner. Commissioner. 4.4
The consequences if sufficient records are not kept
The consequences on an entity or persons responsible if sufficient records are not kept are: 4.4.1
The income of the entity may be determined according to the best judgement of the Commissioner and a jeorpady assessment made accordingly.
4.4.2
The entity or the persons responsible [see paragraph 2.1] may be prosecuted and, on conviction, shall be liable to a penalty of not less than one hundred thousand shillings and not more than two million shillings or imprisonment for a term of not more than two years or both such fine and imprisonment.
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Practice Note No 07/2004 Date of Issue 15th December2004 OWNERSHIP OF PLANT AND MACHINERY FOR THE PURPOSE OF CLAIMING DEPRECIATION ALLOWANCES 1.0
TAX LAW
This Practice Note applies in respect of ownership of a depreciable asset for the purpose of claiming depreciation allowances (initial and annual) under section 17 read with paragraphs 2 and 3 of the Third Schedule to the Income Tax Act, 2004. The Note is effective from the year of income 2004. Depreciation allowances are allowed in respect of depreciable assets. A depreciable asset is an asset employed wholly and exclusively in the production of income of a business, which has a benefit to the business lasting more than one year, and which is likely to lose value because of wear and tear, obsolescence or the passing of time. Business assets and Investment assets are excluded. 2.0
INTERPRETATION
2.1
In this Practice Note, unless the context requires otherwise- “Act” otherwise- “Act” means the Income Tax Act, Act, 2004 “Beneficial owner” means the person who has actually incurred the qualifying expenditure on or who has paid for, the depreciable asset and is liable l iable to prove such a claim by documentary or other evidence [example: relevant entries made in the books of accounts of a business, supported by documents such as invoices, vouchers and receipts]. “legal owner” means the person in whose name the depreciable assets is registered or otherwise recorded [example: a certificate of registration for motor vehicle; warranty certificate for a machine; etc.] “Tax computation” means the working sheets, statements, schedules, calculations and other supporting documents forming basis upon which an income tax return is made that are required to be submitted together with the return or maintained by the person making the return or similar documents maintained by the Commissioner forming basis of a jeorpady or adjusted assessment made.
2.2
Any reference to “owner” may also be construed as reference to “owners” where the context context so permits or requires.
2.3
Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act.
3.0
THE APPLICATION OF THIS NOTE
This Practice Note considers the ownership of depreciable assets and its effect on whether a person qualifies to claim depreciation allowances in respect of that asset in determining the person‟s income from any business. 4.0
HOW THE TAX LAW APPLIES
4.1
Deduction for depreciation allowances
In computing the income from a business, depreciation allowances under the third Schedule to the Act [hereinafter referred to as depreciation allowances ] are deductible from the adjusted income of that source. When a business purchases and starts using a depreciable asset, it cannot normally deduct the full amount of the expenditure in the first year except for the plant and machinery used in agriculture or mining business, but can deduct portions of the expenditure for a number of years until the full
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expenditure has been deducted. The deduction system can be straight line method or reducing balance method. Example 1 Below is an example of some machinery which costs Tsh. 10,000,000 which is depreciated at 25% reducing balance method. Each year, the written down value is the original cost minus deductions already claimed. 25% of the written down value can be claimed each year. If the written down value for a pool of assets falls below Tsh. 1,000,000, the entire amount can be deducted. Year 1 2 3 4 5 6 7 8 9 10
Written down value 10,000,000 7,500,000 5,625,000 4,218,750 3,164,063 1,373,047 1,779,785 1,334,839 1,001,129 750,847
Allowance 2,500,000 1,875,000 1,406,250 1,054,688 791,016 593,262 444,946 333,710 250,282 750,847
Example 2 Below is an example of a farm building of Tsh. 10,000,000 which is depreciated at 20% straight line method. 20% of the original cost can be claimed each year for five years. Year 1 2 3 4 5
Written down value 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000
Allowance 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
Below is a table showing the different types of depreciable assets and the depreciation allowances they qualify for in the Act: Class number 1
2
Depreciable assets
Depreciation method and rate Computers and data handling equipment together 37.5% Reducing with peripheral devices; automobiles, buses and minibuses with a seating Balance capacity of less than 30 passengers, goods vehicles with a load capacity of less than 7 tonnes; construction and earth-moving equipment Buses with a seating capacity of 30 or more passengers, heavy general purpose or specialised trucks, trailers and trailer-mounted containers; 25% Reducing railroad cars, locomotives, and equipment; vessels, Balance barges, tugs, and similar water transportation equipment; aircraft; other self-propelling vehicles; plant and machinery used in manufacturing or
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3
4
5
6
7
8
mining operations; specialised public utility plant, equipment, and machinery; irrigation installations and equipment Office furniture, fixtures and equipment; any asset 12.5% Reducing not included in another Class Balance Natural resource exploration and production production rights and assets referred to in subparagraph (3) in respect of natural resources prospecting, exploration and development expendiutre Buildings, structures and similar works of a permanent nature used in agriculture, livestock farming or fish farming, dams, reservoirs and fences Buildings, structures and similar works of a permanent nature other than those mentioned in Class 5 Intangible assets other than those in Class 4
20% Straight line
20% Straight line
5% Straight line
I divided by the asset‟s useful life Straight line Plant and machinery (including windmills, electric 100% generators and distribution equipment) used in agriculture
A pooling system is used, so that instead of calculating depreciation for each asset separately, all assets in a similar class can be calculated as a group. However, for class 7 assets, each asset is put in a separate pool. 4.2
Initial allowance
Certain depreciable assets are allowed 50% initial allowance (first year allowance). This means that the proportionate amount of the cost of the asset is deducted in the first year. In the following years the remaining cost of the asset may be depreciated using the normal method according to which class the asset is in (annual allowance). This special allowance applies to plant and machinery – machinery – a) that is – is – used in manufacturing processes and fixed in a factory; used for providing services to tourists and fixed in a hotel b) that is added to the person‟s Class 2 or 3 pools of depreciable assets for a business of the person.
4.3
Depreciation balancing adjustments
If a person sells a depreciable asset or the asset is destroyed, the person must calculate the depreciation balancing adjustment. This is equal to the difference between the market value of the asset and the written down value the residual value of the asset after deducting the depreciation allowance for the year. If a person sells an asset for less than its written down value, the person may deduct the difference. If the person sells an asset for greater than its written down value, the person person must add the difference to the person‟s income. 4.4
Conditions for depreciation allowances
4.4.1
Certain depreciable assets are allowed initial (first year) allowance, meaning that 50% of the cost of the asset is deducted in the first year the asset is used in business [see para 4.2]. In the subsequent years the remaining cost of the assets may be depreciated using the appropriate pool depreciation rates.
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4.4.2
A.
To qualify for initial allowance in respect of a depreciable asset for a year of income, a person has to satisfy all the following conditions: he was carrying on a business qualifying for initial allowance during the year of income;
B.
he has incurred qualifying expenditure in respect of that asset during the year of income;
C.
that asset was used for the purpose of the business; and
D.
at the end of the accounting period (or, if the asset was disposed of, at the time of disposal), he was the owner of the asset.
4.4.3
To qualify for annual allowance in respect of a depreciable asset for a year of income, a person has to satisfy all the following conditions:
A.
he was carrying on a business during the year of income;
B.
he had incurred qualifying expenditure in respect of that asset;
C.
that asset was used for the purpose of the business; and
D.
at the end of the year of income, i ncome, he was the owner of the asset and the asset was in use.
Where initial allowance is granted annual allowance will be allowed in the subsequent years. Initial and annual allowance are not granted in one year of income. 4.5
Ownership of an asset
4.5.1 “Ownership” of an asset refers to either legal or beneficial ownership. 4.5.2
While it is normal for an asset to be owned and used by the same person in his business, it is also possible that:
A.
the asset is registered in the name of one person (the legal owner) [see paragraph 2.1] although the qualifying expenditure has been incurred by another person (the beneficial owner) [see paragraph 2.1]; or
B.
the asset is registered in the name of one person the legal owner) although the qualifying expenditure has been incurred jointly by the legal l egal owner and another person; and
C.
the asset is used for the purpose of the business of the legal owner or the business of the beneficial owner.
4.6
Asset owned by and used for the purpose of the business of the s ame person
A person who is both the beneficial and legal owner of a depreciable asset and uses that asset for the purpose of his business is entitled to claim the depreciation allowances in respect of that asset. Example
Bora Kupata purchases a van on 21.06.2005 and registers it in his own name. He uses the van in his grocery business, for which accounts accounts are prepared to 31 December December every year. As at 31.12.2005 the van is still in use. In computing the income from his grocery business for year of income 2005 Bora Kupata qualifies for depreciation allowances on the van as he has fulfilled the prescribed conditions [see paragraph 4.4.3 above]:
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A. B. C. D.
4.7
he was carrying on a business during the basis period; he has incurred qualifying expenditure for the purpose of his business; the asset was used for the purpose of his business during the year of income; and at the end of the year of income, he was the owner of the asset and the asset was in use for the purpose of his business. Asset used for the purpose of the business of a person but registered in the name of another person
4.7.1 Asset used for the purpose of the business of the beneficial owner but registered in the name of another person
Where a person has: A.
incurred the qualifying expenditure on the asset; and
B.
that asset is used for the purpose of a business of his during the year of income; and
C.
the asset was still in use at the end of the year of income; i ncome;
that person (the beneficial owner) is entitled to claim the annual allowance in respect of that asset, even though he is not the registered owner of the asset. Example
Mambo Safi purchases a lorry in year 2006 and registers it in the name of Mambo Poa. The lorry is used by Mambo Safi in carrying on his transportation business. business. Mambo Poa is not entitled to claim capital allowances as he has h as not incurred the qualifying expenditure. 4.7.2 Asset registered in the name of a person and used for the purpose of the business of more than one beneficial owner Where: A.
more than one person has incurred qualifying plant expenditure expenditure on a depreciable asset;
B.
that asset is used for the purpose of a business of each of them during th e year of income;
C.
the asset was still in use at the end of the year of income, and
D.
the asset is registered in the name of only one of the beneficial owners or in the name of some other person;
each of the beneficial owners of the asset is entitled to claim cl aim the depreciation allowances in respect of that asset in the appropriate proportion as determined by his respective share of the qualifying expenditure incurred.
[In such a situation, a statement to the effect that more than one person is claiming the depreciation allowances in respect of the same asset together with details of the apportionment must be made in their respective tax computations.] computations.] Note: The above does not not apply to a similar situation which which involves a partnership.
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Example
Brothers Jua and Kali, each operating his own restaurant business, together purchase a van costing shs. 26,000,000 on 01.09.2001. Jua pays shs.16.0m and Kali pays shs. 10,000,000. The van is registered in Jua‟s name. The van is used in both Jua‟s and Kali‟s businesses in the year of income. i ncome. The accounts of both businesses are closed on 31 December. Initial and annual allowance shall be computed as follows:
Year of income 2006 Qualifying expenditure
Jua
Shs. 16,000,000 Shs. 10,000,000
Initial allowance [cost due] Balance Annual Allowance (37.5%) ( 37.5%) Written Down Value
Kali
NIL
NIL
Shs. 16,000,000 Shs. 10,000,000 Shs. 6,000,000
Shs. 3,750,000
Shs. 10,000,000
Shs. 6,250,000
For year of assessment 2006, Jua can claim initial allowances amounting to shs. 6,000,000 and Kali can claim shs. 3,750,000 in respect of the van.
4.7.3 Asset registered in the name of, and used for the purpose of the business of, the legal owner but qualifying expenditure incurred by another person Where the qualifying expenditure in respect of a depreciable asset is incurred by a person (the beneficial owner) but it is registered and used for the purpose of the business of another person (the legal owner), neither the beneficial nor the legal owner is entitled to claim the depreciation allowances since neither has fulfilled all the prescribed conditions. Example
Mazao Bora Ltd. Purchases a lorry and registers it in the name of its subsidiary company, Ndizi Safi Ltd. The lorry is used by Mazo Bora Ltd. in conducting its business. Neither company qualifies for the t he depreciation allowances in respect of the l orry, since:
A.
although it has incurred capital expenditure, Mazao Bora Ltd. did not incur it for the purpose of its business, nor did it use the asset for the purpose of its business; and
B.
although it used the asset for the purpose of its business, Ndizi Safi Ltd. has not incurred the qualifying expenditure.
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Practice Note No. …08/2004 Date of Issue 15Th December 2004
SELF-ASSESSMENT (ENTITIES) 1.0 TAX LAW. This Practice Note applies in respect of an assessment made by an entity under section 94 of the Income Tax Act, 2004. Where an entity files a return of income, an assessment shall be treated as made on the due date for filing the return. The assessment is of the income tax payable by the entity under section 4(1)(a) and (b) of the Act in the amount shown in the return and the amount of that tax still to be paid for the year of income in the amount shown in the return (the “tax payable payable on the assessment”). Where an entity fails or is not required to file a return of income for a year of income then, until such time as a return shall be filed, fi led, an assessment shall be treated as made on the due date for filing the return that (b)
(c)
the income tax payable by the entity for the year shall be equal to the sum of any income tax withheld from payments deserved by the entity during the year and any income tax paid by the entity by instalment for the year of income, and there is no tax payable on the assessment as sessment
2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act.
3.0 THE APPPLICATION OF THIS PRACTICE NOTE
This Practice Note considers an assessment for a year of income treated as made when an entity files with the Commissioner a return of income on the due date for filing such return as provided for under section 94 of the Act. 4.0
HOW THE LAW APPLIES.
4.1
The Self Assessment System System applies where a taxpayer taxpayer determines his own tax liability and pays pays the tax on specified due dates. Under this system an entity is initially supposed supposed to file its own estimate of income, compute tax at appropriate tax rate and pay the estimated annual tax by quarterly instalments. Within six months months from the end of an an accounting period period an entity shall file a return of income and audited accounts accounts stating its actual actual income and actual tax for the year of income. income. An entity shall pay the balance of the tax due or claim the refund of overpaid tax on the date of filing the return.
Statement of Estimated Tax Payable An entity which is an instalment payer shall file with the Commissioner an estimate of its income and tax payable for the year of income by by the date for payment of of the first instalment. The tax estimate for the year of income shall be paid by quarterly instalments:4.2
4.4
Calculation of each instalment of income tax payable pa yable
The amount of each instalment of income tax payable by an entity which is an instalment payer for a year of income is calculated according to the following fomula:
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(A – – C) B Where: A = is estimated tax payable payable at the time of the the instalment. B = is the number of instalments remaining remaining for the year including the current instalment instalment C= is the sum of; i. ii. iii.
income tax paid during the year of income but prior to the due date for payment of the instalment; and income tax withheld during the year prior pri or to the due date; and defaulted income tax holding which is liable for f or payment by the entity as a withholder.
Where an instalment shall be payable at a time when an entity‟s estimated tax payable for a year year of income is shs. 50,000/= or less or the amount of instalment is shs. 12,500/= or less, the amount of the instalment shall be nil. The instalments are payable on or before the last day of 3rd, 6th, 9th and 12th months of the year of income. The income and tax estimates may be revised at any time during the year of income if circumstances change. Example M/S ABC Co. Ltd is a manufacturer of fruit juice. ABC Co. Ltd. Also has fixed Deposit Account which which earned the company interest income income of Shs. 1,600,000 during during the year. Income from the manufacturing manufacturing business business in the prior year was Shs. 7,500,000/=. The company estimates its manufacturing income for the year of income as 8,000,000/=. The accounting period of ABC Co. Ltd. of the company is 01 January – January – 31 December and that the company th received its first payments of interest on 30 March of Shs. 400,000/= and withholding tax payment was Shs. 40,000/=. Solution The instalment payment for 31st March is as follows:Estimated business income shs. 8,000,000, taxed at the corporation tax rate of 30% Estimated Estimate d Investment Investme nt Income shs. 1,600,000 Estimated Total Income shs. 9,600,000 Tax withheld shs. 40,000 Number of instalments 4 Instalments Amounts Total income = shs. 9,600,000 9,600,000 Tax thereon = shs. 9,600000 x 30% = shs. 2,880,000 Instalment Payable = shs. 2,880,000 – 2,880,000 – 40,000 4 Instalment for March = shs. 710,000 Example 2 Assume facts similar to those in Example 1, but the company wants to adjust the income and tax estimate on 30th September to take into account the income tax amounts withheld in June and September.
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Solution Since 10% withholding tax on interest income is made on quarterly basis, same must have been withheld for March, June and September equals Shs. 40,000 x 3 = shs. 120,000/=. The instalments for March and June June which have been paid: paid: shs. 1,420,000 The remaining two instalments will be computed as follows: Total tax payable Tax paid being March and June instalmenst Remaining instalments: Shs. 710,000 x 2 = hs. 1,420,000 Withholding to March, June and September Shs. 40,000 x 3 shs.
120,000 Total
shs. 2,880,000
shs. 1,540,000 shs. 1,340,000 1,340,000
Shs. 2,880,000 – 2,880,000 – 1,540,000 2 = shs. 1,340,000 = shs. 670,000 2 Instalments for September and December will be each shs. 670,000 4.4
An entity which has filed a return of income
Where an entity files a return of income it is treated that an assessment is made on the due date for filling the return. The return must show Income Tax Payable from the total income of the entity during the year of income less tax withheld from payments derived by the entity and income tax paid by instalments by the entity during the year of income. A notice of assessment will not be served to an entity that complied with the furnishing a return within the due date. The Commissioner is deemed to have made the assessment on the day day the return is filed. The Commissioner may, within three years adjust an assessment made as a self assessment or a jeorpady assessment. The Commissioner Commissioner may adjust an assessment at any time -: (1) in the case an entity fails to file a return of income income with the intent of of evading evading or delaying delaying the the payment of tax; or (2) in the case an an the assessment assessment that that is inaccurate inaccurate by reason of of fraud fraud by or on on behalf behalf of of the entity assessed. 4.6
Tax payable on the assessment and due date for payment
4.6.1
Tax payable
Under the Self Assessment system tax payable by an entity means income tax imposed on the total income i ncome for the year of income including amounts payable by a withholding agent, by an instalment and an assessment. 4.6.2
Calculation of tax payable
Example Where an entity has total income of shs. 8,000,000 8,000,000 for a year of income inclusive of a non-final withholding payment of shs. 3,000,000 was withheld and instalment payable of shs. 1,500,000 were made during the year of income, the tax payable is calculated as follows:35
Income tax rate is 30% of the chargeable income as contained under the 1st schedule. Tax payable on the assessment is calculated as follows: Income Tax on Total income Shs. 2,400,000 Less: Tax paid by Instalments 1,500,000 Tax paid by withholding 300,000 1,800,000 Tax on assessment. 600,000 4.6
Where an Entity Entity files a Return of income with no tax payable on the assessment
Where an entity files a late return of income with no tax payable, will be liable for late submission penalty of Shs. 100,000/=. An assessment to charge the penalty will be served on the entity and the date for payment will be specified therein. 4.7
Where an entity files a Return of income with a Tax Credit
Example th - Income filed on 30 June, 2002 indicates the following Chargeable income for the year of income shs. 2,000,000 Income tax payable on total income “ 600,000 Income tax paid by instalment “ 800,000 Income tax paid by withholding nil Income tax refundable “ 200,000 th - An application for a refund is filed on 30 July 2002
The Commissioner shall effect a refund within 45 days from the date the application was received. But if there is unpaid tax that is due, the excess amount will be applied to discharge such liability.
4.8
Where an entity fails to file a return of income
An entity that has not filed a return of income is treated as having made an assessment on the due date for filling a return. The income tax payable payable by such entity for the year shall be equal to taxes taxes already paid by withholding and instalments. There will be no tax payable on the assessment. 4.9
Where an entity is not required to file a return of income
A non resident entity other than one with a domestic permanent establishment which has no income tax payable for the year of income or its total income consists of a gain from the realization r ealization of land or buildings situated in the United Republic of Tanzania is not required to file a return of income unless such entity elects to file a return. 5.0 Relief for errors or mistake in a return Where for any year of income an entity has filed a return and treated an assessment having been made made for f or the year of income and alleges that the assessment was excessive by reason of some errors or mistake of fact in such return, then the entity may object to the Commissioner disputing such assessment. The objection shall be administered in accordance with the provisions of the Tax Revenue R evenue Appeals Act, 2000.
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Practice Note No.09/2004 Date of Issue 15th December 2004 RESIDENCE, SCOPE OF LIABILITY AND SOURCE OF INCOME AND LOSS 1.0 TAX LAW. This Practice Note applies in respect of – – (a) tests of residence of – – (i) an individual; (ii) a partnership; (iii) a trust; and (iv) a company. (b) (c) (d) (e)
Scope of income tax of a resident and non-resident person. Source of income and loss. Sources directly included and deducted amounts and Sources of payments.
2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act. 3.0 APPPLICATION OF THIS PRACTICE NOTE
This Practice Note considers the determination of – – 3.1 (a) (b) (c) (d)
The basis of residence in the United Republic of Tanzania of – an individual, a partnership a trust a company
3.2
Scope of income liable to tax
3.3
Source of income and loss.
4.0
HOW THE LAW APPLIES.
4.2
Residence in Tanzania
4.2.1 Test of residence of an individual An individual is resident in the United Republic for a year of income if the individual; (a)
has a permanent home in the United Republic and is present in the United Republic during any part of the year of income, in come,
(b)
is present in the United Republic during the year of income for a period or periods amounting in aggregate to 183 days or more;
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(c)
is present in the United Republic during the year of income and in each of the two preceding years of income for periods averaging more than 122 days in each such year of income; or
(d)
is an employee or an official of the Government of the United Republic posted abroad during the year of income.
Example (1) Mr. T who maintains a permanent home in Tanzania was abroad between 1.1.2002 and 8.12.2003 came back to Tanzania between 8.12.2003 and 25.12.2003. Since he maintains a permanent home in Tanzania and was present for the period 8.12.2003 and 25.12.2003. Mr. T will be regarded “resident” regarded “resident” in Tanzania for the year of income 2003. (2)
Mr. A who was abroad, returned to Tanzania on 11.6.2003 and again left Tanzania on 31 January 2004. Since his stay in Tanzania during the year 2003 was of over 183 days, he will be regarded “resident” in in Tanzania during the year of income 2003.
(3)
Mr. B has not maintained a permanent home in Tanzania. He came to Tanzania on 1.4.2003. He left Tanzania on 15.8.2003 i.e after stay of over 122 days. Prior to 1.01.2003 he was in Tanzania in years 2001 and 2002 for 126 and 123 days respectively. Since Mr. T was present in Tanzania for more than 122 days for each of the year 2003 and the two preceding years i.e years 2002 and 2003 he is treated as resident for the year 2003 although he was present for a period of less than 183 days.
(4)
Mr. C is employed by Tanzania Government and has been posted at the Tanzania Embassy in Geneva Switzerland since 1.8.2002. Mr. C did not come to Tanzania during the year of income 2003. Since Mr. C is an official of the Government of the United Republic posted abroad he is treated as resident in Tanzania during the year of income 2003.
4.2.2 Test of residence of a partnership. A partnership is a resident partnership for a year of income if at any time during the year of income a partner is a resident r esident of the United Republic.
4.2.3 Tests of residence of a trust. A trust is a resident r esident trust for a year of income if – – (a) it was established in the United Republic; (b) at any time during the year of income, a trustee of the trust is a resident r esident person; or (c) at any time during the year of income a resident person directs or may direct senior managerial decisions of the trust, whether the direction is or may be made alone or jointly with other persons or directly or through one or more interposed entities. Example 1. Mwambao Trust which was registered in Tanzania on 02.03.2004 has four trustees. During the year 2004 only one trustee was resident resident in Tanzania Tanzania and the other other three were non-resident. Since Since the trust was established in Tanzania, by registration under a Tanzania law, and one of the trustees was resident in Tanzania during the year of income the trust is treated as a resident trust for the year of income 2004. 2.
Mlima Trust was registered in Tanzania on 15.04.2004 with four foreign based trustees all of whom were not resident in Tanzania during the year of income 2004. In the absence of the trustees the Chief Executive Officer, who was resident in Tanzania during the year of income, directed the affairs of the trust including making senior managerial decisions of the trust. Since the trust was established in Tanzania and a resident person, though not a trustee directed the trust, the trust is treated as a resident trust during the year of income 2004.
3.
Bara Trust was registered in Kenya in 2003 with three trustees who were all resident in Tanzania during the year 2004. The trust conducted business in Tanzania during the year of income. Since the
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trust was not established in Tanzania the trust is i s treated as non-resident non -resident for the year 2004 though all its trustees were resident in Tanzania during the year. In fact the trust will always remain nonresident as long as it was not established in Tanzania.
4.2.4 Tests of residence of a corporation. A corporation is a resident corporation for a year of income if:(a) it is incorporated or formed under the laws of the United Republic; or (b) at any time during the year of income the management and control of the affairs of the corporation are exercised in the United Republic. 4.2
Scope of income liable to tax
The chargeable income of a person for a year of income shall be – be – (a) in the case of a resident person, the person‟s income from employment, business or investment for the year of income irrespective of the source of the income; and (b)
in the case of a non-resident non-resident person, the person‟s income income from the employment, business or investment for the year of income, but only to the extent that the income has a source in the United Republic.
(c)
the income of a resident person without a permanent home in Tanzania and who at the end of the year of income has been resident in the United Republic for two years or less in total during the whole of the individual‟s life shall be chargeable to tax only on income that has a source in Tanzania.
Example Mr. B has income during the year of income 2004 from the following sources – sources – 1. 2. 3. 4. (i) (ii)
Income from house property in Tanzania Business income from a Tanzania business Dividend on shares in Tanzania company
shs. “ “ shs.
Foreign income Interest on deposit in banks out side Tanzania shs. 700,000 Dividend on shares in foreign companies (not received in Tanzania) shs. 300,000 Total income shs.
5,000,000 3,000,000 500,000 8,500,000
1,000,000 9,500,000
If Mr. B is resident in Tanzania Tanzania his total income will will be taken at shs. 9,500,000/= 9,500,000/=.. However he will be entitled to foreign tax relief under section 77 of the Act in respect of income tax paid outside Tanzania on the foreign income component which has been included in calculating Mr. M r. B‟s total income. If Mr. B is non-resident in Tanzania during the year of income or has been in Tanzania for two years or less in total during the whole of his life his income will only be shs. 8,500,000/=, which has source in Tanzania, and his foreign income from whatever source will not be included in his total income. 4.5
Source of income and loss
For the purpose of income tax under the Act a person shall calculate the person‟s income or loss from employment, business or investment that has a source in the United Republic separately from any income or loss from that employment, business business or investment that has a foreign source.
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4.5.1 Income or loss which has source in Tanzania (a) Income of a person from employment, business or investment has a source in the United Republic if the amounts directly included in calculating that income that have a source in the United Republic exceed the amounts directly deducted in calculating that income that have a source in the United Republic. (b)
Loss of a person from any business or investment has a source in the United United Republic to the extent that the amounts directly deducted in calculating the income from business or investment exceed the amounts directly included in calculating that income.
4.5.2 Income or loss which has a foreign f oreign source A person‟s foreign source of income or loss from an employment, business or investment shall be calculated as follows – follows – (a) the person‟s worldwide income or loss from that employment or business or investment; less (b) any income with a source in the United Republic from that employment, business or investment; or plus (c) any loss with a source in the United Republic from that employment, business or investment. Example Mr. A had during the year of income i ncome 2004 the following income – income – i) ii) iii) iv) v)
Employment income in Tanzania Business income in Tanzania Investment loss in Tanzania Employment income in Kenya Business income in Kenya Worldwide income
Tshs. 15,000,000 Tshs. 24,000,000 Tshs. (6,000,000) Kshs. 7,000,000 Kshs. 4,000,000 Shs. 44,000,000
Mr. A‟s foreign sourced income during the year is i s calculated as follows: Worldwide income Less Income with with a source source in Tanzania Plus loss with a source in Tanzania Foreign sourced income
Tshs. 44,000,000 “ 39,000,000 Tshs. 5,000,000 6,000,000 Tshs. 11,000,000
4.4
Amounts directly included in calculating calculating income income which have a source source in the the United United Republic
4.4.1
In calculating business income all incomings, gains and amounts have a source in the United Republic. incomings for trading stocks; gains from realization of business assets or liabilities of the business as calculated under Division III of Part III of the Act; or amounts required to be included under paragraph 4 of the Third Schedule to the Act on the realization of of the person‟s depreciable assets of the business.
i) ii) iii)
4.4.2
In calculating investment income net gains from the realization of investment assets of the investment as calculated under Division III of Part III of the Act to the extent to which a domestic asset or liability is invested have a source in the United Republic.
4.4.3
Subject to paragraph 4.4.1 payments that have a source in i n the United Republic.
4.7
Amounts directly deducted deducted in calculating income that have a source in the United Republic.
The following amounts directly deducted deducted are treated as having a source in the United Republic – Republic – 40
(a)
Trading stock allowances allowances calculated in accordance accordance with section 13(2) of the Act.
(b)
Depreciation allowance in respect of depreciable assets owned and employed by a person wholly and exclusively exclusively in the production of the person‟s income from the business.
(c)
Expenditure in respect of repair and maintenance of depreciable assets owned and employed by a person wholly and exclusively in the production of income from business to the extent to which wh ich – –
i) ii)
they relate to domestic assets; or they relates to moveable tangible assets used by a person who conducts a business of land, sea or air transport operator operator or charterer to carry passengers who who embark or cargo or mail mail which is embarked from Tanzania.
(d)
Losses from the realisation of business assets, investment assets and liabilities of a business where the asset or liability involved is a domestic asset or domestic liability.
(e)
4.6
All payments which have a source in the United Republic.
Sources of payments
The following payments have a source on the United Republic – Republic – (a)
dividends paid by a resident corporation;
(b)
interest paid by a resident r esident person or domestic permanent establishment;
(c)
natural resource payments made made in respect of or calculated by reference to natural resources taken from land or the sea situated within the United Republic or its territorial waters;
(d)
rent paid for the use of, right to use or forbearance from using an asset situated in the United Republic;
(e)
royalties paid for the use of, right to use or forbearance from using an asset in the United Republic;
(f)
premiums for general insurance paid to and proceeds from general insurance paid by a person in respect of the insurance of any risk in the United Republic;
(g)
payments received by a person who conducts a business of land, sea or air transport operator or charterer in respect of – – i) ii)
the carriage of passengers who embark or cargo, mail or other moveable tangible assets that are embarked in the United Republic, other than as a result r esult of transhipment; or rental of containers and related equipment which are supplementary or incidental to carriage referred to in subparagraph (i);
(h)
payments received by a person who conducts a business of transmitting messages by cable, radio, optical fibre or satellite or electronic communication in respect of the transmission of messages by apparatus established in the United Republic, whether or not such messages originate originate in the United Republic;
(i)
payments, including service fees, of a type not mentioned in paragraphs (g) or (h) for or attributable to employment exercised, service rendered or a forbearance from exercising employment or rendering service – service –
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i) ii)
in the United Uni ted Republic, regardless of the place of payment; or whether the payer is the Government of the United Republic, irrespective of the place of exercise, rendering or forbearance;
(j)
proceeds of life insurance and retirement payments not falling within paragraph (i) paid by a resident person or a domestic permanent establishment and any premium or retirement contribution paid to a resident person or domestic permanent establishment to secure such a return;
(k)
gifts and other ex-gratia payments to the extent received in respect of business or investment conducted with domestic assets; and
(l)
payments not mentioned in the above paragraphs made in respect r espect of – – i)
the acquisition of a domestic asset, incurring of a domestic liability or realisation of such an asset or liability; or
ii)
activity conducted or a forbearance from conducting activity in the United Republic.
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Practice Note No. 10/2004 10/2004 rd Date of Issue 23 December, 2004 INCOME FROM EMPLOYMENT 1.0 TAX LAW. This Practice Note applies in respect of the taxation of income i ncome from employment. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise – otherwise – “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act. 3.0 THE APPLICATION OF THIS PRACTICE NOTE. This Practice Note considers:3.1
What constitutes employment.
3.2
General rule for taxation of income from employment.
3.3
Taxable employment income payment.
3.4
Excluded payments.
3.5
Taxation of allowances.
3.6
Taxation of benefits in kind.
3.7
Quantification of taxable benefits in kind.
3.8
Provision of employer‟s motor vehicle for personal use of the employee.
3.9
Loans provided in return for services. ser vices.
3.10
Provision of residential housing.
4 4.1
HOW THE LAW APPLIES. What constitutes employment
The Act defines “employment” as – (a) a position of an individual in the employment of another person; (b) a position of an individual as manager of an entity other than as partner of a partnership; (c) a position of an individual entitling the individual to a periodic remuneration in respect of services performed; or (d) a public office held by an individual, and (e) includes a past, present and prospective employment. 4.2
General rule for taxation of income from employment
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The general rule is that income from employment is “the individual‟s gains or profits from any employment for a year of income”. 4.3
Taxable employment employment income payments
In calculating gains or profits from the employment of the employee for the year of income the following payments shall be included:inclu ded:Payments of wages, salary, payment in lieu of leave, fees, commissions, bonuses, gratuity or any subsistence, travelling, entertainment or other allowance received in respect of the employment or services rendered.
Payments being reimbursement by an employer of personal expenditure by the employee or an associate of an employee. (Personal expenditure includes any expenditure incurred by the employee in the maintenance of himself, his family or establishment establishment or for any other personal or domestic purpose).
Payments for the employee‟s agreement to any conditions of the employment, (includes such payments made before the commencement of the employment).
Retirement contributions and retirement payments paid by an employer.
Payment for redundancy or loss or termination of employment relating to the year of payment (current year of income)
Other payments made in respect of the employment including benefits in kind.
4.4
Excluded payments, i.e. non-taxable payments
The following payments payments are excluded in calculating the employee‟s income i ncome from an employment:
Any allowance that represents solely reimbursement to the employee of expenditure spent wholly and exclusively in the production of the income of the employer is excluded from employment income. Reimbursement to the employee of an amount expended by him wholly and exclusively in the production of the employee‟s income from employment. Medical services, payment for medical services and payment for insurance for medical services provided to the employee, the employee‟s spouse and up to four of the employee‟s children and is available on a non-discriminatory non-discriminatory basis to all employees of the employer. Benefits derived from the use of employer‟s motor vehicle by the employee for the employe e‟s personal use is generally taxed as a benefit in kind provided the employer claims relief or deduction in relation to ownership, maintenance or operation of the vehicle. However, if the employer does not claim the deduction or relief the benefit is excluded from the income of of the employee. Since the Government does not pay income tax from business activities that are the functions of government and therefore does not claim deductions. Government employees employees do not pay tax on this benefit. Benefit derived from the use of residential premises by an employee of the Government or any institution whose budget is fully or substantially out of Government budget subvention. Where an employer makes payment for providing travelling for the employee, the employee‟s spouse and up to four children between the place of work and the place of domicile which is more than 20 miles away, the payment is not included in calculating the income from employment provided that the employee is recruited or engaged for employment solely in the service of the employer at the place of employment. For example an employer-provides passage costs for the employee to take up
44
employment or to go on annual leave for the employee and the employee‟s family the payment for the passages is not taxed subject to meeting those requirements.
On premises cafeteria services available on a non-discriminatory basis to all employees of an employer are not taxable as a benefit in kind. ki nd. Small benefits or payments that are unreasonable or administratively impracticable for the employer to account or allocate to their recipients are also not taxable. Retirement contributions paid by an employer on behalf of the employees towards approved retirement funds, subject to the limit of the actual contribution or the statutory amount, are not taxable.
4.5 Taxation of allowances Any allowance payable by a employer to the employees is taxable. However an allowance that is payable solely as reimbursement to the employee of the expenditure spent wholly and exclusively in the production of the income of the employer is excluded from the employees‟ employment income [See Practice Note 11/2004 on Taxation of Allowances, Gifts Tips etc]. If an employee receives a travelling and accommodation allowance and that allowance is spent entirely on travelling and accommodation for the employee while the employee is away solely for the employer‟s business purposes, purposes, then the payment is not taxable. 4.6 Taxation of benefits in kind Where an employer makes payment for the personal needs of an employee through providing the employee with goods or services (as opposed to money) these are called benefits in kind. Taxable benefits in kind typically include those benefits which are for the personal use or consumption needs of the employee (e.g. employer providing housing for employee, employer providing for education of the employee‟s children, employer employer giving goods or services free or at a cost lower than the market value to the employees). 4.7 Quantification of taxable benefits in kind In general, the value of benefit in kind is quantified by the market value of the benefit, that means, the money that another person would have to pay on the market to receive the same good or service. However, special quantification rules apply to provision of motor vehicle, subsidised loans and provision of housing. Where an employer provides a benefit in kind which is chargeable on the employee which is not easily attributed to a particular month, then for the purposes of the tax withholding, the amount of the benefit shall be treated as paid to the employee proportionately over each month during which the payment or benefit is provided. provided. 4.8 Provision of an employer’s motor vehicle for personal use of the employee Where an employer provides a motor vehicle for the private use of the employee, this is a taxable benefit to the employee. However, where the employer does not claim a deduction in relation to ownership, maintenance or operation of the vehicle the benefit is not taxable on the employee. Where the benefit is i s taxable, it is quantified using the following table:
Engine Size of Vehicle Not exceeding 1000cc Above 1000cc but exceeding 2000cc Above 2000cc but exceeding 3000cc Above 3000cc
Quantity of payment Vehicle less than 5 Vehicle more than 5 years old years old Shs. 250,000 Shs. 125,000 not Shs. 500,000 Shs. 250,000 not
Shs. 1,000,000 Shs. 1,5000,000
45
Shs. 500,000 Shs. 750,000
The age of the motor vehicle is calculated from the date date of the first fi rst registration of the vehicle in Tanzania. 4.9 Loans provided in return for services Where an employer provides a loan to the employee and where the term of the loan is twelve months or more and the aggregate amount of the loan and any other similar loans outstanding at any time during the previous twelve months exceeds three months basic pay, with no interest or interest rate below the statutory rate; the foregone interest amount on the loan is a taxable benefit. The benefit for the year of income is quantified as the difference between the interest the employee pays pays (if any) and the interest that would have been paid using the statutory interest interest rate applicable during during the year of income. Statutory rate in relation to a calendar year means the Bank of Tanzania discount rate at the start of the year. 4.10 Provision of residential housing The value of housing, including any furniture or other contents, is calculated as the lesser of i) the annual market value of the rental of the house; or ii) the greater of 15% of the employee‟s total income for the year year excluding the housing benefit component and the expenditure claimed as a deduction by the employer in respect of the premises during the year of income. Example 1 Where an employer provides residential housing to the employee whose salary is shs. 12,000,000/= for year, for which market rental value is shs. 960,000/= per year and the employer claims a deduction of shs. 1,080,000/= per year the housing benefit is calculated as follows: i) Market rental value: shs. 960,000/= ii) (a) 15% of of the salary: salary: shs. 1,800,000/= 1,800,000/= (b) Deduction claimed: shs. 1,080,000/= 1,080,000/= The value of the benefit is the lesser of shs. 960,000/= and greater of 1,800,000/= and shs. 1,080,000/=, i.e. the lesser of shs. 960,000/= and shs. 1,800,000/=. Hence the value of housing benefit is shs. 960,000/= for the year of income, which is shs. 80,000/= per month. Example 2 A company had one employee during the year of income and the following were the employee‟s monthly emoluments. Basic salary Transport allowance Lunch allowance Medical allowance Total taxable pay
=
Shs.400,000/= Shs.400,000/= Shs.250,000/= Shs.250,000/= Shs.150,000/= Shs.150,000/= Shs. 50,000/= Shs.850,000/= Shs.850,000/=
6.2. Example 3 Referring to remuneration details in example 2 (a) Assuming that an employee was housed by his employer freely. Suppose the ma market rket value of rental at that area was shs.200,000/= per month and the expenditure claimed by the company for that premises was 150,000/= Solution: (i) Compare 15% of Total emoluments (excluding housing benefit) with expenditure claimed is 150,000/= you take 150,000/=. (ii)
Compare the market value which is 200,000/= 200,000/= and 150,000/= take the lesser l esser which is 150,000/=.
Tax Computation: Refer example 2 Total emoluments 850,000/=
46
Add Housing benefit Total
150,000/= 1,000,000/=
(b) Refer (a) above. Assume that the employee contributes Shs.50,000 as rent, the housing benefit will be:Solution: Housing benefit computed in (a) above Less amount paid by employee Total
150,000/= 50,000/= 100,000/=
6.3. Example 4 Refer to remuneration details in Example 2 Beside the emoluments stated in Example 2, the employee received the following benefits: (i) A new self drive car for private use, which is 3000 cc. The company claims expenditure on the car maintenance and ownership against against their taxable income. i ncome. (ii) Loan advance of Shs.3,000,000 payable in 24 monthly instalments and free of interest. (Assuming the statutory rate in relation r elation to the calendar year was 12% p.a. charged on Total loan). (iii)
Other benefit – benefit – electricity - Water
Solution Total emoluments per Example 2 Add – Add – Car benefit Annual (cc 3000) = 1,000,000/= Per month = divide by 12
50,000/= pm 20,000/= pm
850,000/=pm 850,000/=pm
83,333/= pm
Loan interest Interest per statutory rate 12% x 3,000,000/= 30,000/= 12 Less interest paid NIL
Loan Interest benefit Other benefits Electricity Water Total taxable income
=Shs. 30,000/=pm
50,000/= 20,000/= = Shs.1,033,333/= Shs.1,033,333/=
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Practice Note No. 11/2004 11/2004 st Date of Issue 31 December, 2004 ALLOWANCES, GIFTS AND TIPS INCOME FROM EMPLOYMENT
1.0 TAX LAW. This Practice Note applies in respect of the taxation of income i ncome from employment. 2.0 INTERPRETATION. In this Practice Note, unless the context requires otherwise – otherwise – “Act” means the Income Tax Act, 2004. Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Practice Note as they have in the Act. 3.0 THE APPLICATION OF THIS PRACTICE NOTE. This Practice Note considers:3.1
Allowances, gifts and tips as emoluments.
3.2
Payment of Allowances.
3.3
Business expenses and allowances. all owances.
3.4
Foreign service allowance.
3.5
Scholarship income.
3.6
Board members sitting allowance.
3.7
Gifts - General.
3.8
Gifts and voluntary payments.
3.9
Gifts in kind.
3.10
Gift for special services.
3.11
Tips.
3.12
Prizes and incentive schemes.
4.0 HOW THE LAW APPLIES. 4.1
Allowances, gifts and tips as emoluments emoluments
The Income Tax Act, 2004 provides to charge to tax allowances, all owances, gifts and tips being gains or profits from employment as follows: Any subsistence, travelling, entertainment or other allowances received in respect of employment or services rendered except subsistence, travelling, entertainment or other allowance that represent solely the reimbursement to the recipient an amount expended by the recipient wholly and exclusively in the production of his income from fr om employment or services rendered. Other payments made in respect of the employment.
48
4.2
Payment of Allowances
Many business bear directly certain expenses of their employees, and in case of directors and senior employees a fixed expense allowance is often paid in addition to the salary. It is frequently a matter of practice whether such payments and allowances are treated as part of the emoluments of the office or employment. Where individual disbursements disbursements in the exercise of the employment employment are borne or reimbursed by the employer the disbursements are not treated as forming part of the emoluments of the employee, although they may have the effect of saving the employee‟s employee ‟s expense or providing an amenity. But where the allowance is excessive it is assessable as forming part of the emoluments, in which case the employee can deduct the portion of the payment qualifying as an expense wholly and exclusively incurred in the production of the employee‟s income from the employment. 4.3
Business expenses and allowances
Special arrangements may be agreed between an employer and the employee that certain expenses including travelling expenses and allowances for the cost of meals and accommodation will have to be provided by by the employees themselves when when working away away from their normal base. If the employee carries out a substantial part of the duties at the permanent business address of the employer, that address is the normal base for for the employee‟s purpose. Otherwise the normal base is the place, place, such as filming location or or studio, at which which the duties are carried out. Allowances within within the terms of of the arrangements do not have to be included i ncluded in calculating the employee‟s monthly pay. pay. 4.4
Foreign Service Allowance
Where any allowance to any person in the service of the Government is certified by the Treasury to represent compensation for the extra cost of having to live out of the United Republic in order to perform the person‟s duties, duties, that allowance allowance is not regarded regarded as income for for income tax purposes. purposes. Foreign service service allowances include educational allowances for children of diplomats serving overseas. 4.5
Income arising from a scholarship held by a person receiving full-time instruction at an educational establishment shall be exempt from income tax.
Scholarship income
“Scholarship” includes an exhibition, exhibition, bursary or any other similar educational educational endowment. However, where a person who is normally in employment becomes a full-time student for any period there is no legal provision to exempt the salary which the employee continues to receive.
4.6
A loan to a student which in certain contingency cases is to be repayable is not exempt as being scholarship income when that contingency occurs. Board members sitting allowance
Sitting allowance payable to a member of a board of directors of a public institution is reimbursement or compensation for the extra costs incurred by the member in order to perform the member‟s board duties. Such allowance is not taxable. 4.7 Payment of gift A payment may have no direct connection with the employee‟s remuneration or employment at all, and therefore not be in the nature of an emolument. The fact that there is a link between the payment and the employment, and that the payment would never have been made but for the employment, employment, is not sufficient to render the payment taxable. taxable. It will however, be be taxable if it is paid to the employee employee as a reward for or in return for acting as or being an employee. 4.8
Gifts and voluntary payments
49
Gifts and voluntary payments made by an employer employer or similar similar interested person with definite reference to an employment held by the recipient and by virtue of his office are taxable. 4.9
Gifts in kind
Gifts in kind to employees are not assessable if they can not be turned into money, unless the employee is a director or higher paid employee when the cost of the gift to the employer will be the value of the gift to the employee. 4.10
Gift for special services
Gifts for special services will be taxable if they are received in respect of an office or employment notwithstanding that there is no enforceable right to receive the payments, that they are received after the employment has terminated terminated and that they they are paid by way of gift. Payments made, however, however, not in virtue of the office or employment but by way of testimonial or in recognition of the personal qualities of the recipient will not be taxable. 4.11
Tips
Employees in certain trades trades receive tips which form form a substantial part part to their income. The payments of of tips received from the employer or a third party as a reward for services rendered in the course of the employment are taxable. Payments given as a present in appreciation of the recipients‟ personal qualities, such as faithfulness, and consistency and readiness to oblige, would not be taxable. 4.12
Prizes and incentive i ncentive schemes
Under an incentive scheme, prizes may be awarded by an employer to his employee, for the efficient performance of their work, such such as for time-keeping, production, production, sales, etc. Such payments are taxable taxable on the employees.
TAX FOR NATIONAL DEVELOPMENT
50
