Essential Principles in the Taxation of Employment Income (PAYE)

The taxation of employment income is a cornerstone of individual taxation and a consistently high-yield topic for professional examiners. Computations hinges on classifying income, apply statutory exemptions and deductions, and correctly utilise tax credits.

1. Employment vs. Non-Employment Income: The Fundamental Split

The initial and most critical step in an individual tax computation is the correct segmentation of income.

• Employment Income: Income earned as a direct result of an employment contract. This income is subject to a sliding scale of progressive tax rates (tax bands).

• Non-Employment (Business/Trade) Income: Income derived from a trade, investment, or profession. This income is generally taxed at a flat rate, often stipulated in the Act (e.g., a flat rate of 25% for business income, plus any applicable levies).

2. The Significance of a Taxpayer’s Age (Elderly Status)

The age of a taxpayer is not merely biographical detail; it triggers specific tax concessions. An individual is considered an Elderly Person if they have attained the age of 55 years prior to the beginning of the year of assessment.

The tax implications for elderly persons include:

• Elderly Credit: A non-refundable tax credit of $900 per annum.

• Exemptions on Investment Income: The first $3,000 of interest accruing from a deposit with a financial institution is exempt. The first $3,000 of interest from bankers’ acceptances is also exempt.

• Exemption on Rental Income: The first $3,000 of rental income is exempt from tax.

• Exemption on Pensions: Pension receipts are generally exempt from tax.

• Motor Vehicle Disposal Exemption: Exemption on the benefit arising from the disposal of a motor vehicle to the elderly employee by their employer at below market value.

   

3. Residence Status: The “Ordinarily Resident” Trap

Most individual questions state that the taxpayer is “ordinarily resident.” This statement has two major implications:

1. Source of Income (Section 12 Deeming Provisions): Being ordinarily resident means that certain income types, even if physically received or accrued outside the country, are deemed to be from a Zimbabwean source and are therefore taxable. Examples include income for services rendered during temporary absence, dividends, interest, and annuities.

2. Credits Eligibility: Certain tax credits, such as the Disability Credit and the Medical Expenses Credit, are only claimable if the person was ordinarily resident in the country during the year of assessment.

    

4. Key Exemptions Applicable to Individuals

Candidates must be conversant with all statutory exemptions. Common exemptions that confuse students often relate to health and medical benefits:

• Compensation for Injury/Sickness: Benefit or compensation paid to a taxpayer as a result of sickness, injury, or death at work is exempt, whether paid by the employer, a benefit fund (e.g., NSSA), or a Medical Aid Society (including refunds).

• Employer-Paid Medical Aid Contributions: The contribution made by an employer on behalf of an employee to a Medical Aid Society is an exempt benefit to the employee. (Crucially, note that this contribution does not qualify as a credit to the employee).

• Employer-Provided Medical Treatment: The value of medical treatment or travel to obtain such treatment, provided directly by an employer to the employee, their spouse, or child, is an exempt benefit.

5. Taxation of Pensions Receipts

The tax treatment of pensions depends primarily on the fund’s approval status and the nature of the receipt (lump sum vs. commutation).

• Unapproved Funds: Receipts from unapproved funds are not taxable.

• Approved Funds: Receipts from approved funds (Pension Fund, Retirement Annuity Fund) are generally taxable, but receipts from Benefit Funds are excluded (i.e., exempt).

• Disallowed Contributions: If a pension is received as a lump sum, the full aggregate amount of previously disallowed portions of pension contributions must be deducted from the lump sum amount to arrive at the taxable portion. If the pension is received as a commutation, the disallowed portion should be spread over the commutation period.

6. Taxable Benefits (Fringe Benefits)

A benefit provided by an employer is generally valued based on the cost to the employer of providing the benefit.

• Exception (Value to the Employee): The benefit for Housing and Furniture is uniquely valued on the basis of the value to the employee.

• Reduction of Benefit: The taxable benefit is always reduced by any amount the employee pays to the employer (e.g., an employee’s contribution to rent in the case of a housing benefit).

• Loan Benefit Exemption: A commonly tested item, if a loan is provided by the employer, the interest benefit is an exempt benefit to the extent that the loan proceeds were used for the medical treatment of the employee, their spouse, or child.

7. Allowable Deductions and Tax Credits

These final stages are where the most common mistakes occur.

Allowable Deductions (Reduces Taxable Income)

Expenses are only allowed if they are explicitly mentioned in the Act.

Tax Credits (Reduces Tax Liability)

Tax credits are subtracted directly from the tax chargeable. There are five main credits available: