Rebasing of Capital allowances for Income Tax Purpose.
On 31 December 2020, the Minister of Finance issued an amendment to the finance (No.2) Act 10/2020 by insertion of the following:
“If, in relation to capital allowances claimed (in any year of assessment before the year of assessment beginning on the 1st January, 2021, in terms of paragraphs 2, 3 and 4 of the Fourth Schedule to the Taxes Act, any balance of such allowances remains unredeemed as at the 1st January, 2021, any such unredeemed balance shall rebased to the local currency equivalent of the outstanding foreign currency invoice value using the exchange rate prevailing on the 1st January, 2021.”
Income Tax Implication.
The effect of the change is to allow in the year of assessment ended 31 December 2021, a rebasing of the brought forward unclaimed income tax values from the tax year ended 31 December 2020. Capital allowances for the year of assessment ended 31 December 2021 will be determined on the basis of the rebased income tax values brought forward.
The mechanism provided is to allow for the income tax values relating to qualifying assets that were acquired in foreign currency prior to 31 December 2020 to be restated from the original exchange rate on date of acquisition to the exchange rate applying on 1 January 2021. Accordingly, the brought forward income tax values of those assets acquired prior to 22 February 2019 (change of currency) will be re-denominated from a rate of 1:1 to a rate of 81.7866. Income tax values of assets acquired in foreign currency between 22 February 2019 and 31 December 2020 are also subject to restatement from the respective exchange rate on date of acquisition to a rate of 81.7866.
Where a company acquired an Asset in 2016 which was subject to 2.5% capital allowance on cost, for USD100 000 the following situation resulted prior to the amendment.
| YEAR | CAPITAL ALLOWANCES CHARGED IN THE YEAR |
ALLOWANCES/ INCOME TAX VALUE OUTSTANDING CAPITAL |
| 2016 | 2 500 USD | 97 500 USD |
| 2017 | 2 500 USD | 95 000 USD |
| 2018 | 2 500USD | 92 500 USD |
| 2019* | 2 500 ZWL | 90 000 ZWL |
| December 31, 2020 | 2 500 ZWL | 87 500 ZWL |
| EFFECTIVE DATE OF CHANGE IN LEGISLATION | ||
| January 1 2021 | – | 7 156 328* |
| 2021 | 204 467 ZWL | 6 951 862 ZWL |
*The Outstanding capital allowances have been translated to ZWL using the interbank rate at January 1, 2021 which was 81.7866. Therefore, assuming that capital allowances are calculated on the purchase figure (100 000 x 81.7866) the capital allowances for 2021 will be 2.5% x 8 178 660.
The Capital allowances are claimable during the assessment period, and should be included in the computation for calculating the Provisional Tax for each Quarterly Payment Date (QPD).
