Businesses are liable to remit income tax.The article explores on the computation of business and investment income. It also explains the differences between accounting income and tax income. The determination of business income is the same whether the business is carried on by

• • an individual,
  • a corporation,
  • a partnership, or
  • a trust.

Persons who are liable to pay tax on business and investment income pay based on annual quarterly payment dates. ITF12B return should be submitted quarterly. To grasp Income Tax, we should explain the definition of “Trade or Business Activity”

Business activity-The term business has the same meaning with the term trade. A “trade” is defined in terms 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 and anything done for the purpose of producing such income.

It is anything that occupies an individual’s time, attention, and labour for the purpose of making a profit.An individual may not be operating an active business with obvious income-earning activities, but the underlying intent of transactions may be trade for profit. In determining if one is engaged in an business or not, courts often uses the following three principal tests:

• whether the taxpayer dealt with the property acquired by him in the same way as a dealer in such property ordinarily would deal with it;
• whether the nature and quantity of the property was such that it could not produce income or personal enjoyment for its owner and the only purpose of acquisition was to sell the property; and
• whether the taxpayer’s intention of purchasing the property indicated a trading motivation to sell the property for a profit, rather than as an investment only.

Business income versus employment income.

Income from employment is not business income. Deductions are allowable against business income, while very few expenses are deductible against employment income, while the starting point in computing business taxable is accounting profit.

Business income versus capital gains
Distinguishing between business income and capital gains is important because only specified assets attracts capital gain tax and not business tax. Gains or loss on disposal of fixed assets and shares are not included in gross income. Amounts deductible in arriving at capital gains and business income also differ significantly. If you speculate on the stock exchange for example you are taxable on the gains as business income because that is considered income from business.

Business versus hobby/personal venture
The distinction between a business and a hobby or personal venture is important. Hobby or personal venture income is non taxable. Expenditure which you incur in undertaking a hobby or personal venture is non deductible, because it is not incurred in the production of income.
The courts often distinguishes a commercial activity from a hobby or personal venture by examining whether or not there is a personal benefit or hobby element to the activity. A commercial activity is often guided by the reasonable expectation of profit. If it lacks the pursuit of profit element it is classified as a hobby.

The following are some of the tests often used in differentiating a business activity from a hobby:

• • the manner of organization
  • information they have to run the business
  • past experience
  • frequency of transactions
  • money put into activity in order to make money
  • existence of legal relationships
  • commercial character of the activities
  • the size and scale of the activities
  • characteristics or quality of the property dealt in, and
  • inherent characteristics of a taxpayer

Income Tax Computation in Zimbabwe.

Determining taxable income.

Taxable income is net profit adjusted for cash items and other taxman items.

Income Tax is charged at a rate of 24%. Aids levy is 3%. Effective rate 24.72%.