How individuals on Trade and Investment Income are taxed in Zimbabwe

TAXATION OF INDIVIDUALS ON TRADE AND INVESTMENT INCOME

This article provides a comprehensive guide to the taxation of individuals in Zimbabwe who derive income from trade (business) and investments, outlining the principles, rates, and concessions governing these income streams.

1. The General Principle: Taxed Like Corporates

Individuals in receipt of trade and investment income are generally taxed using the same principles applied to corporates, particularly regarding the determination of taxable income.

• Trade Income: This is income derived from a trade (business), profession, or vocation. For example, an individual running a sole proprietorship, small shop, or consultancy who has not formally incorporated a company is taxed under this category.

• Tax Rate: With effect from January 1, 2024, the standard rate of tax on an individual’s taxable income from trade or investment is 25%.

• AIDS Levy: A 3% AIDS Levy is charged on the income tax payable (the 25% liability). This results in an effective combined tax rate of 25.75% (25% + (3% of 25%)).

2. Tax Principles on Gross Income

The core principle is to determine Taxable Income by taking the Gross Income and subtracting all Allowable Deductions and Exemptions.

• Source and Accrual: Apply tax principles consistently, such as the source of income (Section 12 of the Income Tax Act), deemed sources, and whether the income has accrued or been received.

• Capital Nature: Income must be revenue in nature (not capital) to be included in gross income. Capital gains are taxed separately under the Capital Gains Tax Act.

3. Exemptions & Allowable Deductions

Individuals are taxed just like corporates in that income that is exempt remains exempt, and only expenses wholly and exclusively incurred in the production of income (Section 15 of the Income Tax Act) are allowed as deductions.

A. Exemptions for Elderly Taxpayers (Age 55+)

Individuals aged 55 years or older are eligible for specific income tax exemptions and concessions:

• Interest Exemption (Local): Exemption on interest from a deposit with a financial institution—the first US$3,000 per annum.

• Bankers’ Acceptances: Exemption on interest from bankers’ acceptances—the first US$3,000 per annum.

• Rental Income Exemption: Exemption on rental income accruing to an elderly person, up to a maximum amount of US$3,000 per annum. The amount remaining after the exempt portion is taxed at the normal rates.

B. Allowable Deductions (Rental and Trade Income)

Deductions must be revenue in nature and related to the production of the income. Expenses of a capital nature (e.g., property improvements) are generally prohibited.

For Rental Income, deductible expenses include:

• Property Expenses: Municipal rates, levies, and property taxes.

• Maintenance & Operations: Caretaker’s wages, repairs and maintenance, garden services, and security costs.

• Administration: Commissions payable to estate agencies, advertising costs for vacant properties, and insurance premiums.

• Finance Charges: The interest portion of a mortgage or home loan payment.

Prohibited Deductions (Section 16): It is critical to note that no deduction is allowed for:

• Domestic or private expenses.

• The cost incurred by any taxpayer for personal or family maintenance.

• Rent or expenses on premises not occupied for the purposes of trade, except for the part occupied for trade.

4. Different Tax Rates to Different Forms of Investment Incomes

It is essential to separate income according to its nature, as different investment incomes are subject to unique tax treatments, often in the form of a final withholding tax.

5. Credits

Credits are a sum deducted directly from the tax chargeable. They are available to individuals who meet certain criteria to reduce their income tax liability, whether arising from employment or non-employment (business/investment) income.

• Utilisation: If a taxpayer has already claimed credits on their employment tax liability, the same credits cannot be claimed again against business income. However, the unutilised portion of any credit from employment income can be claimed against business income tax liability.

• Specific Example: Elderly persons (55+) in receipt of remuneration are entitled to an Elderly Person’s Credit of US$900 per annum.

6. Withholding Taxes (WHT)

A withholding tax is tax levied at the source of the payment. The treatment of WHT depends on the type of income and the recipient’s residency.

• Mechanism: WHT is levied on gross figures (before deduction of WHT). The amount of WHT deducted stands as a credit against the final income tax liability determined upon assessment.

• Resident Interest Exception: Interest paid to a resident taxpayer, which has been subjected to a withholding tax (e.g., 15% or 5%), is generally considered a final tax, making that interest income exempt from any further income tax calculation.

• Rental WHT: A WHT of 15% is levied on the gross rent paid to non-resident landlords.

7. Double Taxation

Where an individual has received income from a foreign source (e.g., foreign dividends, foreign interest) which is also taxable in Zimbabwe by virtue of it being deemed to have accrued from a source within or deemed within Zimbabwe (Section 12 of the Income Tax Act), a double taxation situation may arise.

• Calculation: When calculating the tax chargeable in Zimbabwe on those foreign incomes, the gross amounts are used.

• Double Taxation Relief (DTR): A DTR is calculated and credited against the final tax liability. The relief is the lesser of:

  1. The tax levied (and proven to have been paid) in the foreign source country.

  2. The tax levied in Zimbabwe on that same foreign income.