Lecture 2: Gross Income

General framework for determination/calculation of tax payable

• Section 7 of the ITA provides a basis for the calculation of tax
liability of a taxpayer.
• Appropriate rates of taxes as fixed by the charging act, i.e. the
Finance should be used.
• Before applying the rates, one should compute what is termed as
the taxable income.
• The provisions of the tax statutes and case law give guidance in
arriving at the taxable income.
• Framework for calculation of tax payable:
Gross Income [Sect 8; Sect 10 & Sect 12 of ITA] xxx
Less: Exempt Income [Sect 14 as read with 3rd Schedule, ITA] (xxx)
Income xxx
Less: Allowable deductions [Sect 15] (xxx)
Taxable Income xxx
Apply tax rates (FA)
Gross tax xxx
Less: Tax Credits (FA) (xxx)
Net tax xxx
Add: Aids Levy (at 3% of net tax) xxx
Tax liability xxx
Less: Tax paid in advance / Provisional tax (xxx)
Tax Payable or Refundable xxx/ (xxx)
 General framework continues….
• The subsequent topics will be structured in line with the
above framework.
• The components of the above framework will be explained
in the lectures which follow: starting with Gross income
 Lecture 2: GROSS INCOME
• Section 8(1) of the ITA defines gross income as:

…the total amount received by or accrued to or in favour of a person or

deemed to have been received by or to have accrued to or in favour of a
person in any year of assessment from a source within or deemed to be
within Zimbabwe excluding any amount so received or accrued which is
proved by the taxpayer to be to be of capital nature.

• The term gross income is very important in tax law because it is the starting
point in the determination of the tax liability of a taxpayer.

• The above definition gives a general formula of what should, and what
should not, be included in a person‘s taxable income.
 Lecture 2: GROSS INCOME

• From the definition , the following terms are the pillars of the principle of gross income:
 Total amount

received by

accrued to or in favour of a person

In any year of assessment

From a source within or deemed to be within Zimbabwe

Receipts or accrual should not be of capital nature,

 Lecture 2: GROSS INCOME
2.1 Meaning of ‘amount’
• Section 2 of the Income Tax Act(ITA), defines an amount as money or any other
property corporeal or incorporeal, having an ascertainable monetary value.
2.2 Meaning of ‘received’
• A taxpayer can be said to have received an amount even if it is not paid to him
personally but to his agent, or if it is banked on his behalf.
• The amount must, however, be one to which the taxpayer has a legal claim.
• A person does not receive money which, for example, has been stolen: COT v G
(1981) 43.
• Nor does he receive in the sense used in the Act, money which has been lent to
him, as held in CIR v Genn & Co (Pvt) Ltd (1955)
• In ITC 675 (1949), the court held that, since deposits received from purchasers of
day-old chicks to be delivered in future were not refundable at the instance of the
depositor represented income in the hands of the seller.
 Lecture 2: GROSS INCOME
2.3 Meaning of ‘accrued’
• An amount is said to have accrued to a person if the person becomes
unconditionally entitled to the amount in the year of assessment.
• A prominent case of reference in tax law is probably that of Lategan v
Commissioner of Inland Revenue (1926).
• In the above case, the word accrued was held to mean ―to which he
has become entitled.
• In other words amounts that are due but remain unpaid are assessable.
• For a person to be entitled to an amount, he must acquire the legal
right to receive payment.
• In other words, the person must be in a position to enforce payment in
the courts of law if the payment remains outstanding.
 Lecture 2: GROSS INCOME
2.4 Accrued or received?
• Income may accrue in one year and be received in another, this will likely pose a
challenge as to which year of assessment the income should be taxed?
• The phrases: received by or accrued to…in any year of assessment… from the
definition of gross income in the Act suggest that income is taxed on the earlier of
date of receipt or accrual.
• The principle above gives the Commissioner the right to levy tax in any year.
• This was recognised in the principle of CIR v Delfos (1933).
• It should be noted, however, that the Commissioner does not have an unrestricted
power to choose the year of assessment.
• On the basis of the views expressed in Silverglen v SIR (1968), it is submitted that
where accruals are disclosed he is bound to use the accruals basis, in which event
the receipts basis will be applied only in cases of non-disclosure of accrual, as in
the case of Maguire v COT.
 Lecture 2: GROSS INCOME

2.5 Year of assessment

• Means a period of 12 months beginning on the 1st of
January in any year and;

• Includes any period within such a year of assessment.

 Lecture 2: GROSS INCOME
2.6 Source of income
• The Act itself contains no definition of ‘source’.
• Clarity is sought from decided court cases(case law).
• The test laid down by Watermeyer, CJ, in CIR v Lever brothers and Unilever Ltd (1946)
is authoritative, namely that;

• The source of income is not where it comes from(the quarter whence it comes) but the
work which was done by the taxpayer which resulted in the income being earned(the
originating cause of the income).

• i.e. the quid pro quo(effort, work) which he gives in return for the income.

• The work may be a business, an activity, an enterprise, mental or physical effort,

employment of capital to earn income or letting the use of capital to someone else.
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2.6 Source of income continues…
So in determining the ‘source of income’ two questions should be asked;
1. What is the ‘originating cause of the income’?-i.e. what form of work
did the taxpayer do in order to earn the income?

2. What is the geographical location of this ‘originating cause of

income’?-i.e. where did the taxpayer do the work which resulted in
him/her earning the income?

• The geographical location of the originating cause of income is the

source of income.
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2.6 SPECIFIC SOURCES OF INCOME(ORIGINATING CAUSE)
2.6.1 Royalties
• The source of income is the place where the intellectual property was created i.e.
where the author exercised his wits and labour. Case: Millin v CIR (1928).
• The same principle applies to income from patent rights, and other similar accruals
from intellectual property of a taxpayer.
2.6.2 Trademarks and ‘know how’
• The true source is the country where the recipient carries on the activity, or employs
the asset, giving rise to such income.
• Trademarks are an exception to all other forms of intellectual property as in the case
of ITC 1491 (1991).
2.6.3 Services rendered under an employment contract
• Where services are rendered in an employment contract, the source of income is the
place where such services are rendered. Case of COT v Shein (1958) FC.
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2.6 SPECIFIC SOURCES OF INCOME(ORIGINATING CAUSE)
2.6.4 Directors’ fees
• The source of income for directors’ fees is where the head office of the company to which the
director renders his services is located.
• Thus, if the head office is located in Zimbabwe then the director’s fee is from a Zimbabwean
source. Case of ITC 106 (1927).
• If however, the director renders his services in the capacity of an employee, i.e. earning a salary
then the source of such income is determined by the place where the services are rendered.
2.6.5 Services rendered in the course of carrying of business or trade.
• The principle for rendering of service stands that the place where the services are rendered is
the source of income.
2.6.6 Sale of shares
• The originating cause of income derived from the sale of shares is the buying and selling of
shares, thus the place where the shares were traded IS THE SOURCE OF INCOME.
• The principal case is that of Commissioner for Inland Revenue (CIR) V Black, 21 SATC 226.
 Lecture 2: GROSS INCOME
2.6 SPECIFIC SOURCES OF INCOME(ORIGINATING CAUSE)
2.6.7 Income derived from trade
• The source of income from trade is the place where the trade is carried out , Case: Smith & Co. v
Greenwood, 8 T.C. at 203-4. or ;
• Where the trade is controlled; Case: San Paulo (Brazilian) Rly Co. Ltd v Carter, [1896].
2.6.8 Business operations- profits
• The source of profits from business operations is the place where the operations are being carried
out.
• If the business operations extend beyond one country, then the source of profits is the country of
dominant activities.
• Where the business profits arise from trading activities which extend beyond one country the
source of profits is taken to be the country in which the goods are sold.
• Australian Case :Commissioner of Taxation of Western Australia v Murray Limited, 42 C.L.R. 332.
2.6.9 Dividends
• The source of income for dividends is the country in which the company from which dividends are
paid is incorporated. Case: Boyd v CIR (1951).
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2.6 SPECIFIC SOURCES OF INCOME(ORIGINATING CAUSE)
2.6.10 Annuities
• The source of an annuity, in the case of contractual annuity, is the place
where the contract was concluded: Boyd v CIR (1951).
• In the case of a will trust, the source of an annuity is the place where
the will is executed: ITC 826 (1956).
2.6.11 Interest
• Interest income is derived from the letting of use of capital to another
person.
• The source of interest is the place where the credit was granted(loan) or
the place where the capital producing the interest was employed(other
activities). Dunn & Co. and Overseas Trust Corp Ltd. v C.I.R, 1926 A.D
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2.6 SPECIFIC SOURCES OF INCOME(ORIGINATING CAUSE)
2.6.12 Rentals
• The source of rental income from immovable property, such as building, is the place in
which the property is located.
• Thus, the country in which the property is situated is the place in which the owner of such
property has employed his capital.
• In the case of movables, the general rule may vary according to circumstances.
• For short term leases(less than 5 years), the source of rentals will be the country in which
the owner of the hired assets carries on business.
• For long term leases-5years and above, the country where the asset is used by the
customer constitute the source of rentals as held in the case of, COT v British United Shoe
Machinery (Pty) Ltd (1964) 26 SATC 163.
2.6.13 Partnership profits
• The source of partnership profits is the place where the partner renders his services to
earn the partnership income, CIR v EPSTEIN, 1954.
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2.7 Deemed Sources(Sect 12)
• There are cases where the ITA assumes that income is from a source within Zimbabwe even if
the true source is not Zimbabwe.
2.7.1 Contract for the sale of goods: Sect 12(1) (a)
• If a contract for the sale of goods is made and concluded in Zimbabwe the source of the income
is deemed to be Zimbabwe.
2.7.2 Income derived from rendering of services: Sect 12(1) (b)
• If a person earns income from the rendering of services in Zimbabwe, the source of that income
is deemed to be Zimbabwe.
• A person can render services in the course of employment or in carrying on of a trade.
• Trade is defined in section 2 of the Act as including any profession, trade, business, activity,
calling, occupation or venture, including the letting of any property, carried on, engaged in or
followed for the purposes of producing income.
• It does not matter where the funds or payment for the services rendered comes from, what is
important is the fact that the services producing the income have been performed in Zimbabwe.
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2.7.3 Income from services rendered by an employee during period of temporary
absence from Zimbabwe: Sect 12(1) (c)
• If an ordinary resident of Zimbabwe receives remuneration for services rendered(as an
employee) outside Zimbabwe during a period of temporary absence, the source of such
income is deemed to be Zimbabwe.
• A period of temporary absence is a period not exceeding 183 days in aggregate during a
year of assessment.
• In literal sense, it is a period less than six months.
• This section specifically includes a director in the definition of an employee.
2.7.4 Services rendered to Zimbabwe government: Sect 12(1) (d)
• Remuneration paid to a government official who is an ordinary Zimbabwean resident is
deemed to be from a Zimbabwean source regardless of the place where the services are
rendered.
• An exception is services rendered to the Zimbabwe government by a person who is not a
resident of Zimbabwe.
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2.7.5 Services rendered: Pension and Annuities: Sect 12(1) (e)
• An amount received by a person in the form of a pension or an annuity for services
rendered in Zimbabwe from wherever source, is deemed to be from a source within
Zimbabwe.
2.7.6 Interest and dividends: Sect 12(2)
• Foreign dividends and interest received by a person in any year of assessment is deemed
to be from Zimbabwe.
• The dividends or interest should be received or accrue or deemed to have accrued to the
recipient at the time he is an ordinary resident of Zimbabwe.
2.7.7 Annuities: Sect 12 (3)
• An annuity received from outside Zimbabwe is deemed to be from a source within
Zimbabwe if the right to the annuity was acquired by the annuitant at the time he was an
ordinary resident of Zimbabwe.
• The right to the annuity should have been acquired by payment of a sum of money or
have been acquired by way of a disposal of an asset by the annuitant or by both means.
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2.8 Deemed accruals(sect 10).
• In order to combat tax avoidance, there are instances where the ITA assumes that income has
accrued to a person even if the taxpayer is trying to divorce him/herself from the income.
2.8.1 Income not paid over [S10 (1)]
• Income is deemed to have accrued to a taxpayer even though it has; been invested, accumulated or
otherwise capitalized by him; or not been actually paid to him, but remaining due and payable to him;
or has been credited to an account or reinvested or accumulated or capitalized or otherwise dealt with
in his name or on his behalf.
2.8.2 Partnership income [S10 (2)]
• Income accruing to a partnership is deemed to be accruing to the partners in proportional to their
agreed profit sharing ratios.
2.8.3 Income accruing to a minor child [S 10 (3)]
• Income accruing to a minor child from a donation, settlement or other disposition made by one of his
parents is taxable in that parent‘s hands.
• A minor child is a child under the age of 18 years and unmarried.
• However, if a minor child receives income in his own right, such as wages for services rendered, he, and
not his parent, is taxable on such income.
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2.8.4 Cross donations [S 10 (4)]
• If a parent makes a donation to a child of another parent, and if the parent of the child to whom a donation
is made; or his spouse or near relative makes a reciprocal donation to the child of the first parent the
donations are taxable in the hands of the parents.
2.8.5 Income postponed by stipulation of maker of donation, settlement or other disposition [S 10 (5)]
• To curb tax avoidance, this section is meant to restraint an attempt by a taxpayer, who makes a donation
(commonly to a trust) for the purpose of divesting himself of the right to the income from the donated
assets but at the same time withholding such income from the donated assets from the beneficiaries until
the happening of some event.
• The withheld income is deemed to remain that of the donor if:
1. The donor (or near relative) has power to control the ultimate devolution of the income; or
2. Any of the funds or income could devolve or be lent to the donor (or his spouse, or one of their deceased
estates, or a company controlled by any of them).
2.8.6 Income accruing by the rights and power retained by maker of donation or other disposition [S 10
(6].
• If a donor reserves to himself the right to confer the income from a donation, settlement or disposition on
some other person, he is taxable on income arising from the donation, for so long he retains that power.
 Lecture 2: GROSS INCOME
2.8.7 Amounts accruing in the year of assessment and which are
payable after the last day of the end of year of assessment.[ S 10
(7)].

• Where a taxpayer becomes entitled to any amount which is

payable after the last day of the year of assessment, the amount
shall be deemed to have accrued to him in the year of assessment.

• This section provides the basis for taxing income that is receivable
by way of installments such as hire purchase agreements and
credit sales.
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2.9 Receipt of capital nature
• The definition of gross income specifically excludes amounts proved by the taxpayer to be
capital in nature.
• Legislation did not give the meaning of capital nature.
• Reliance can thus be placed on decided court cases so as to elucidate the meaning of the term.
• The basic principle of determining whether an item is of capital or revenue in nature, is to
examine the intention underlying the transaction.
• Where there are more than one intention, then the dominant intention will determine the
nature.
• Any transaction undertaken for a profit motive is of revenue nature and is taxable, despite the
fact that it might be an isolated transaction; Case : Overseas Trust Corporation v CIR (1926) 2
SATC 71.
• As a general rule, capital is wealth used to generate more wealth, income is the fruits of capital
productively employed.
• The sale of fixed capital represents a realization which should not be included in gross income.
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2.9 Receipt of capital nature continues….
Form of capital receipts Explanation
1.Restraint of trade
2.Damages compensation
3.Inheritances
4.Fortuitous receipts
 Lecture 2: GROSS INCOME
Example
Determine the Gross Income for 2018 from the information given below for an ordinary resident of Zimbabwe($)
Insurance Policy Proceeds 12,000
Rent from a house in Harare 25,000
Fixed Deposit account interest from South Africa 1,000
Econet Zimbabwe dividends 3,500
Textbooks royalties from Zimbabwe 53,000
Rent from a house in Botswana 250,000
Salary form ZIMRA 110,000
Royalties from a book written in Nigeria 3,600
Zimbabwe debenture interest 60,000
Annuity from a fund in Zimbabwe 10,000
Allowances from Zimbabwe Government for services rendered in Swaziland 60,000
Leave pay (for December 2017 & January 2018- evenly spread per month) 200,000
Cash in lieu of leave 12,000
Groceries received from employer 500
Commission earned from sell of motor vehicle 74,000
Loan from local building society 50,000