ALLOWABLE DEDUCTIONS

15(2)a is the 2nd Cornerstone of Zim

tax law.
used as a formula, [conceptual
framework], to determine whether an
expense is allowable/deductible or not.
 General Deduction Formula
The deductions allowable shall be:
 expenditure and losses,
 to the extent to which,
 they are incurred
 for the purposes of trade
 or in the production of income
 except to the extent to which they are
expenditure or losses of a capital nature.
 General Deduction Formula
Expenditure – not limited to cash
outlays. Barter & other disposals of
goods also fall within its meaning.
Losses – not the accounting loss.
-Means the loss of working capital, e.g
the loss of money by a lender to a
defaulting borrower.
- It means a Deprivation
 Losses
 In the Joffe and Co vs CIR case, the court held
the meaning in the context was somewhat
obscure and did not mean anything different
from expenditure. The is often used to signify a
deprivation suffered by the loser, usually
involuntary deprivation whereas expenditure is
usually voluntary paymnt of money.
 Expenditure can therefore be designed or
fortuitous.
 Losses
- Includes losses such as Pilferage (theft),
breakages & destruction.
- Not limited to cash outlays but may include
losses arising due to mishaps [Harris Maize
Milling & Produce Co v COT- ]
• Co was unable to recover part of the amt it
had advanced to a sister co.
• Claimed amt as irrecoverable & a loss of
working K fm its money lending.
 Losses
• Held- Co was nt a money lender to be
allowed a dedn under 15(2)a
• Criteria for a lender:
• A degree of continuity in the lending
activity.
• The dominant motive for making the
loans must be to make profit.
 Extent to which
 Extent to which – Allows for apportionment
on an expense and ensures that only the
business portion is allowed
• Business & pvt
• Revenue & K
• An exp incurred to produce taxable & exempt
income.
• Basis of apportionment must be fair &
reasonable-[ Local Investment Co v COT
 Basis of apportionment of Exp
• General expenses were incurred in earning
the co’s total income whc was made up of
both taxable income and exempt income.
• The COT used the ratio of taxable income
to total income to calculate the allowable
exp, the balance being apportioned to the
exempt income.
• Asset basis is the acceptable dptal practice.
 Incurred
 Does not necessarily mean paid
 However, there must be a legal liability
(obligation) to pay, where payment has
not been made by end of tax yr.
 Exp yet to be incurred is only allowed
where it relates to income rcvd in
advance (for goods not yet delivered but
paid for by the customer).
 Purposes of trade
 Means for purposes of enabling the TP to
carry on and earn profits in the business.
 Exp & loss must therefore be related to the
TP’s business transactions.
 Two categories viz:
a) Designed expenditure-voluntary, planned exp.
b) Fortuitous expenditure-Money involuntarily
spent coz TP has been overtaken by some mishap
or misfortune.
 Purposes of trade
• An expense arising out of breaking the law is
not deductible as this is against public policy.
It is not for the common good e.g Traffic
fines, Parking fines & Customs fines.
• Have a wider meaning than “in the pdn of
income ‘. E.g exp incurred with the objective
of reducing or avoiding future exp, hence
increase future profits, is “for the purposes of
trade” but not “in the pdn of income”.
 “In the pdn of income”
 Means pdn of taxable income. [Port
Elizabeth Electric Trainway Cov CIR]
 Exp incurred in the pdn of income of a
capital nature & in producing exempt income
is not allowable.
 Expenses are deductible if they are so
closely linked to the business activities of the
TP so as to be regarded as part of the cost
of performing them (business activities).
 In the pdn of income
 Two questions arise
(a)Whether the act to wc the exp is attached
is performed is in the pdn of income and
(b)Whether the exp is linked to closely
enough
If the expense arises becoz the act done is
unlawful or negligent , then it is probable
that the expense wont be deductible.
 In the pdn of income
 Sub-Nigel Ltd vs CIR highlighted that the expression
incurred in the pdn ofincome does not mean no
deduction will be allowed unless income has been
produced
 Exp must have been incurred for the purposes of
earning income in the current or future year of
assessment.
 NB, if due to the nature of the TP’s bsn, the potential
liability for the pymnt of compensation is considered
closely connected to d TP’S trade, it wil b deductible.
 capital expenses
capital nature - "Money spent in creating or
acquiring an income-producing asset or concern must
be capital expenditure.
•It was invested to yield future profit and while the
outlay did not recur, the income did. There was a great
difference between money spent in creating or
acquiring a source of profit, and money spent in
working it. The one was capital expenditure, the other
was not ….“
•capital expenses are not deductible.
 Revenue Expenses
 The cost of producing the income
 Expenditure necessary for the
performance of the business operation.
 Notional exp are not allowed e.g where u
use you spare room as a business office &
you estimate a rent exp of $100/ month for
the room and for example also provision of
bad debts.
 Xstics of a deductible exp

 One that:
• Must have been suffered
• For purposes of gaining taxable income
• In the ordinary course of business (operating
cycle).
 It is not a pvt/domestic exp
 It is not of a capital nature.
 An expenditure shall only be claimed in respect
of the income to which it relates
 GROUP WORK
Come up with a list of expenditures (5, at least, in
each case) which are considered, for tax purposes,
as:

a) Capital expenditures
b) other disallowable expenses
c) Revenue expenditure allowable as a deduction
 Examples of Capital expenses
 Cost of Non current assets
 Goodwill
 Transport costs on acquisition of movable
assets, incl travelling exp to purchase a NCA
 Machinery installation costs
 Alterations to title deeds (the item itself eg land
not the doc)
 Rates paid on vacant stand
 Loss on disposal/sale of a NCA
 Transfer duty on a Non-Current Assets
 Legal expenses incurred in drawing initial
lease agreement for business premises
 Entrance fees to business associations
 New business license
 Architect fees
 Pilferage (theft ) by a manager who has
proprietary rights and by a partner in a
partnership.
 Improvements to fixed assets
 Painting rented property
Architect’s fees
Loss on sale of fixed assets
Underpinning the foundation of a business
property
Replacement of hedge with durawall
Cost of neon sign, billboards etc.
 Removal of tree threatening business
property
 Cost of partitioning walls
 Re-erection of business premises
 Installation of drainage works on rented
property at the insistence of the
Municipality
 Disallowed Expenses
 Charitable donations
 Professional advice on tax matters
 Fines
 Excessive director’s fees
 Cost incurred in distributing dividends
 Fee paid for assistance in the completion
of an income tax return
 Examples of Allowable expenses
 Cost of tradesman’s tools
 Legal costs for debt collection
purposes
 Cost of protective clothing
Advertising the business
Valuation of assets for fire insurance purposes
Employees’ salaries and wages
Contractual payments on employee’s
termination of employment
Connection fees for water, telephone or
electricity
Business motive donations
 Loan raising fees for loan used to
purchase trading stock
 Minor removals of plant in the same
premises
 Expenses incurred in the removal of
trading stock
 Pilferage by an employee
 Repainting rented property
 Irrecoverable advances to employees
 Subscriptions to business associations
 Contributions towards a private railway siding
where ownership remains with the NRZ
 Bond interest payable on property used for
business
 Irrecoverable contributions to ZESA towards
the cost of a power line
 Action to compel customer to take delivery of
goods purchased
 Statutory Deductions [15(2)
15(2)b Repairs
 to movable assets used and immovable assets
occupied for the purposes of trade.
 Repairs resulting from the letting of property.
 Repairs presupposes the original structure
had deteriorated , necessitating restoration to
original state at the time the asset was first
owned.
 Renewal of part of a whole e.g installation of
a new car engine to a whole car is a repair of
the car.
 Repairs contd

 Substantial reconstruction does not constitute

repairs bt improvements.
 Improvements result in an increase in the
earning capacity of the asset; whereas repairs
reinstate the original earning capacity of the
asset.
 Repairs resulting from the letting of property can
be allowed even when incurred in a subsequent
tax year following the one in which asset ceased
to be let.
 Repairs
 Repairs incurred prior to the assets being
brought into use are capital in nature & shd
be added to the acquisition costs cost.
 Repairs to property being let remain
deductible in the hands of a new owner where
there is a change of ownership, provided the
new owner is also letting out the property.
 The use of new material does not preclude an
expense fm being a repair.
 15(2)d Lease Premium
 Allowable as a deduction in the hands of
the lessee.
 Over the lease term or 10 yrs, which ever
is the shorter period.
 A premium can be apportioned where it
is for both trade and other purposes.
 15(2)e Lease Improvements
 The stated lease improvement or the amt
considered to be fair & reasonable in the hands of
the lessee.
 Spread over the Unexpired lease period or 10 yrs,
whichever is the shorter period.
 For an indefinite lease, the lease term is deemed
to be 10 yrs.
 The excess amt above that stipulated in the agmt
is capitalised & ranks for capital allowances,
except if the asset is a special blg.
15(2)g Bad Debts (Uncollectable debt)
 Requirements for Deductibility:
• It must be proved to the CG tht the debt is
irrecoverable at the end of tax yr (e.g debtor &
assets in estate not enough to cover debt, Debtor
not traceable, went to London)
• Debt must be due & payable to the TP.
• Debt must have been included in the taxable
income of the TP either in the current or prior tax
yr(s).
• Amt has to be specific
 15(2)g Bad Debts contd
 Doubtful debts are not allowed as a
deduction because one can not prove
beyond reasonable doubt that it is
irrecoverable.
15(2)h & 6th Sch- PF, NSSA,BF &
RAF contributions
 Payments made by the employer on behalf employees
are allowable in the hands of the co.
 Similarly, employee’s own contributions are allowable
to the individual employee.
 The amts allowable are determined in accordance
with the 6th Schedule.
 The restrictions are per employee, per annum.
Restricted to the lesser of 7.5% of annual emoluments
or $5 400 p.a. For 7.5% to exceed $5 400, the
individual has to earn above $72 000 p.a.
 6 Sch- PF, NSSA,BF & RAF
contributions, contd
 1 PF (inc NSSA) [para 15] $5 400
 1 RAF [para 16] $5 400
 2 or more PFs [para 18(2)] $5 400
 2 or more RAFs [para 18(2)] $2 700
 Any combination of a PF & RAF [para 18(2)] $5 400
 BF(s) $1 500
 NSSA is part of a PF. NSSA is calculated at 3.5%
of the insurable amt up to $700, thus maximum
NSSA contribution $300 (at $25 per month).
 15(2)i Arrear Pension Fund
Contributions
 Arrear payments for a prior yr are
allowable as long as they do nt exceed $1
800 p.a per individual.
15(2)j Medical Aid contributions
 Medical aid contributions & medical
expenses borne by an employer on behalf
of his employees & his dependence are
allowable in full, there are no restrictions.
 TP’s own contributions to medical aid is not
allowable to the individual, but a medical
aid tax credit is calculated based on the
individual’s own contributions and on
defined medical expenses incurred.
 15(2)m Experiment & research
expenditure
 Allowed if it is incurred in carrying out
experiments & research related to the TP’s trade.
 Research must be carried out by the TP himself.
 Research expenditure must be revenue in nature.
 Capital expenses on research are not allowable
e.g the cost of plant, machinery, premises & rights
used for research are specifically excluded..
 15(2)n Research by 3rd parties
 Where research is done by a 3rd party to whom a contribution is
made, then a proportion of the contribution is allowed to the TP, if
the 3rd party’s exp is not wholly of a revenue nature.
The research expense allowed = B/C*A;
 Where
A=TP’s own contribution, (the party who did not do the research)
B=the cost incurred by the 3rd party who carried the research AND whc
wd have been deductible under s15(2)m had it been incurred by the
TP himself (exp of a revenue nature & related to TP’s trade).
C=total exp incurred on the research by the 3rd party who carried the
research (both revenue & capital).
 In other words, we allow exp, to the extent the TP contributed to the
research.
 15(2)n cont’d
N.B.
1. Both B & C refer to the 3rd party who carried the
research, the researcher.
2. The amt “incurred” by the researcher includes the
contribution from the TP hence most authors do not
state C as being amt incurred by the 3rd party but
merely as the total exp on the research. (both R &
capital; irrespective of where the funding came from).
 C represents “the amount of the expenditure which is
incurred by the other person (the 3rd party) referred to
in this paragraph in carrying out experiments and
research”.
 15(2)o Contributions for Industrial &
Scientific Research
 A deduction is allowed in the hands of the
TP for any contributions with a condition
that the funds be used for industrial or
scientific research related to a TP’s trade
and to a public institution approved by the
CG.
 NB for the dedn to be allowable the
stipulation for use for research and
experiment is a must.
S15(2)p-Cost of grants, bursaries
and scholarship
 Amts contributed in the form of grants, bursaries &
scholarships to enable persons not connected wt the
TP to take technical education related to the TP’s
trade.
 No dedn is allowable if the person taking the course is:
• A director of the company, [except an executive dr who
holds less than 5% of the shares of the co]
• Is a near relative of such a director
• Controls the co
• Is a near relative of such a person who controls the co.
 Who is a near relative?
 A person who is:
a) A linear ascendant of the TP e.g step father or
step mother.
b) A child or linear descendant of the TP.
c) A brother or sister, half bro/sis, step bro/sis,
uncle, nephew or niece of the TP.
N.B. A cousin is not a near relative.
 s15(2)q-Ex-gratia payments to former
employee/partner or dependant (s) of former
employee/partner
 Ex gratia payments are voluntary payments
to a former employee retired due to illhealth,
old age or to dependants of deceased former
employee/partner.
 Max allowance of $500 p.a. to former
employee, who retired coz of ill health,
infirmity or old age
 Max allowance of $200 p.a. to former partner
or dependants of former employee/partner.
 DONATIONS
 s15(2)r- Donations to National bursary or Scholarship fund
• Allowed in full
 s15(2)r1- Donations to Health Institutions
a) To a trust administered by the Minister of Health or
Social Welfare
b) To a hospital operated by the state, local authority or
religious orgn (Public health institution).
c) For the purchase of medical eqpment, construction or
maintenance of a hospital or the procurement of
hospital drugs, inc ARVs.
- $100,000 maximum
 Donations contd
 s15(2)r2- Donations to Research Institutions;
apprvd by minister of higher & tertiary edn.
• Max of $100 000 p.a

 s15(2)r3- Donations to Schools

• For a school operated by the state, local authority
or religious organisation
• For purchase of ednal equipment, construction,
extn or maintenance of sch or purchase of books/
ednal material.
• Max of $100 000 p.a
 DONATIONS contd
 s15(2)r4- Donations to Public Pvt
ptnership fund
• Max of $50 000 p.a
 s15(2)r5- Donations to the Destitute &
homeless persons’ rehabilitation fund
• Max of $50 000 p.a
 DONATIONS contd
1. Donations to political parties, churches &
other social activities are not allowable,
unless approved by the CG.
2. Donations made wt a view to create
goodwill/co image is not allowable: Shell
Rhodesia P\L v COT.
3. A donation to secure an advantage over
competitors or removing competition is
allowable: Rothmans of Pall Mull v COT.
 s15(2)s- Membership Subscriptions
 Continued mbrship to professional, business, trade &
technical associations.
 Allowed to inds & corporates (e.g mbership to ZNNC).
 Subs need nt be related to the trade being carried on,
e.g A CA who is now a farmer can still claim annual
subs to ICAZ.
 Subs for social clubs are not allowed. They are of a
pvt nature.
 Life mbrship is disallowed. It gives a Life Time benefit.
s15(2)t- Preliminary (Prepdn) Expenses
 Conditions for deductibility:
1. A trade must be carried on by the TP. He must be
in business.
2. Exp must ve been incurred within 18 months prior
to the commencement of trade.(The 18 month
rule). Trade commences when first sale is made.
3. Exp must ve been incurred in preparation for trade.
4. Exp must qualify as a dedn i.t.o the General Ddn
Formula i.e Only rev exp are allowable.
 s15(2)u- Opening Stock
 TP is allowed to deduct the value of
opening stock that was included in the
previous year’s gross income under
s8(1)h.
 Valued as per accounting principles i.e the
lower of cost or NRV.
 Valuation methods allowed-FIFO & AVCO.
 LIFO not allowed.
 s15(2)v- Donated or inherited Stock

 Trading stock acquired without payment or at no

cost (other than in the normal course of trade)
 Inherited Stock
Allow the value approved by the Master of the High
Court i.e the value used for estate purposes or at a
value considered fair and reasonable by the CG.
 Donated Stock
Amt should not exceed what the donor of stock
would have claimed as a deduction had he sold the
stock in the ordinary course of trade i.e the fair value
of the stock.
 s15(2)w- Convention & Trade Mission
 Amt spent in attending one convention or one trade
mission
 Deduction allowable only for a single convention OR a
single trade mission per individual, per yr (not both).
 Max of $2 500 per individual, per yr
 Convention must be in connection wth the TP’s trade.
 Trade mission must be approved by the Minister of
Finance.
 If a Convention/trade mission span into another yr, then
exp is allowable in the yr convention/mission ends.
 Where a partner attends & the partnership bears the
cost, each partner is allowed a dedn in proportion to his
PSR.
 Specific Deductions Cont’d; 15(2)
aa) Legal costs on income tax appeals-High Court or SC exp if
the appeal is fully or substantially successful.NB the amt
must not be recordable from any source eg leg ins
ac) Allowance on expenditure not yet incurred – only
allowable if associated income has already accrued e.g
receipts in advance for services to be rendered or goods to
be delivered. An Allowance for expected costs is granted
but it is brought back into income in the subsequent yr.
ag) Double deduction (200%) on the cost incurred on ‘export
market development’
aj) Payment to an ‘Approved employee ownership scheme
The FV of any shares given by the TP (employer) to his
employees is allowable.
kk) Maintenance costs incurred on behalf of local authorities -
$50,000 maximum
 S 15(3)-Assessed loss

 An assessed loss b/forward is deductible.

 A TP is allowed to offset an assessed loss in
one business against another, in any tax yr.
 The net assessed loss is carried over for a max
of 6 yrs.
 Assessed losses are deducted on FIFO basis
 N.B. The assessed loss of a mine is ring fenced
and carried forward indefinitely until the
particular mine makes a profit in future.
 Circumstances in whc assessed loss b/f is not deductible

 A TP who has been declared insolvent.

 A TP who has assigned his property or estate for the
benefit of his creditors.
 Change in shareholding which the CG views to have
been motivated by a desire to take advantage of an
assessed loss.
NB* Assessed losses provide opportunities for the
minimization of tax liabilities especially in mergers and
acquisitions.