Expenditure is deducted in the computation of income tax if it has been incurred in the production of income or for the purposes of trade. Expenditure on acquisition or construction of fixed assets, known as property, plant and equipment (PPE) is not deducted but is written off against taxable income over the tax life of the PPE by way of capital allowances. Assets ranking for capital allowances include Commercial buildings; Industrial buildings; Staff houses; Farm improvements; Implements, machinery or utensils; Motor Vehicles; Computer software among others. Capital allowances are available to all persons deriving income from trade and investment namely sole traders, independent contractors, non-executive directors, partners, companies, and trusts with taxable income etc irrespective of the type of business undertaken. However miners and petroleum operators, have their own methods of claiming capital expenditure.
Capital allowances is the practice of allowing a taxpayer to get a tax relief on capital expenditure by allowing it to be expensed against its annual pre-tax income. Assets must be used in the production of income or for the purposes of trade and also held at the end of the year of assessment. If an asset is constructed or acquired in one tax year then put into use in the following year, capital allowances are only claimed in the year the asset is put into use. Capital expenditure includes the cost of acquiring or construction of the asset itself, initial set up, installation, programming, travel cost to purchase the asset, freight charges, transit insurance, irrecoverable VAT, borrowing cost, foreign exchange losses in respect of the asset etc. There are two methods of claiming capital expenditure, namely Special Initial Allowance (SIA) and Wear & Tear (W&T).
SIA is an investment allowance granted upon election on constructed buildings (other than commercial), additions, alterations or improvement to the said buildings (other commercial buildings) and movable purchased. The Act provides for 90% de minimis use rule, meaning the property must be used at least 90 percent in the production of income or for purposes of trade to be granted SIA. The current rate for SIA is 25% for big businesses and 50% for SMEs in the first year. After the first year, accelerated wear & tear is 25% per annum for three years in the case of big businesses and 25% per annum for 2 years for SMEs. SIA is never apportioned, either the taxpayer qualifies or does not qualify for SIA at all. It is also computed based on cost. Assets under a finance lease qualify for SIA in the hands of the lessee.
Wear and tear is granted in all cases where SIA has not been granted. It is computed on cost of immovable assets purchased or constructed by the taxpayer, additions, alterations and improvements made to immovable properties and on movable property (including on computer software acquired or developed). Wear and Tear is computed on the written down value (tax value) of the asset for movable assets. Wear and tear is not an elective allowance, taxpayers automatically qualifies it in cases where SIA has not been granted. Unlike SIA, wear and tear can also be given on inherited or assets acquired through donation. The rate of wear and tear on immovable property is 5% per annum (2.5% on cost for commercial buildings) and is never apportioned. The general rate of wear and tear on movable property and computer software is 10% on written down value, exceptional cases include motor vehicles where the rate is 20% on written down value. Wear and tear is apportioned in the case of movable property used partly for business and private by the owners of the business. Accelerating capital allowances allows taxpayers to minimise their tax liabilities, making SIA a favourable method to claim wherever possible. However, it is not beneficial for a taxpayer with assessed losses which are about to expire to choose special initial allowance because it will result in increased assessed loss which may not be recovered.
Because certain expenditure also benefits employees among them passenger motor vehicles and employee houses (staff housing), cost ceilings are imposed on it qualifying for capital allowances. Income Tax Act defines ‘staff housing’ inter alia, as any ‘permanent building’ used by the taxpayer for the purposes of his trade wholly or mainly for the housing of his employees, but does not include a residential unit the erection of which commenced on or after 1 January 2009 whose cost exceeds ZWL25,000. A “residential unit” means an apartment, flat, house whether detached, semi-detached or terraced, or similar unit of residential accommodation. A unit that exceeds the said threshold is qualified for purposes of capital allowances. A passenger motor vehicle is a motor vehicle propelled by mechanical or electrical power and intended or adapted for use or capable of being used on roads mainly for the conveyance of passengers. These are luxury type of motor vehicles namely station wagons, estate cars, vans, 4×4 double cabs excluding vehicles used for conveying passengers for gain, used by hotel operators to convey their guests, carrying 15 or more passengers excluding the driver, a vehicle purchased by a taxpayer for leasing under a finance lease, caravans and ambulances. Taxpayers are free to buy passenger motor vehicles of their choice at any cost however, for purpose of capital allowances expenditure in excess of ZWL10,000 per passenger motor is disregarded.
The caps for both staff housing and passenger motor vehicle as above were not reviewed along with other adjustments made through Finance Act no 2 of 2019, thereby have lost meaning as tax incentives. They were previously expressed in United States Dollar but with the gazetting of Statutory Instrument 33 and the amendment in the Finance Act no 2 of 2019, these figures were converted into Zimbabwe dollar on one to one basis. Capital allowances are incentives on capital expenditure which taxpayers must take advantage of, but it is difficult to claim these when you are not a registered taxpayer or have no internal system for tracking your capital expenditure.