TM 738: TAXATION
(Topic 2)
(Topic 2)
by: Greyson Nyantamba
TOPIC TWO: DETERMINATION OF INCOME FROM EMPLOYMENT
What is employment?
Employment Means-
(a) A position of an individual in the employment of another person;
(b) A position of an individual as manager of an entity other than as
partner of a partnership;
(c) A position of an individual entitling the individual to a periodic
remuneration in respect of services performed ; or
(d) A public office held by an individual; and includes a past, present and prospective
employment.
Employee means an individual
who is the subject of an employment conducted by an employer.
Employer means a person who
conducts, has conducted or has the prospect of conducting the employment of an
individual
Normally, employment
is demonstrated by presence of contract of service or employment. The contract
of service exists when an employer dictates what an employee should
do and how, in return for period payments.
In a case of Ready
Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance
[1968] 2 QB 497 it was decided that contract of service might exist
when
i.
An employee agrees that, in consideration of a wage
or other remuneration, he will provide his own work and skill in the
performance of some service for his master
ii.
He agrees, expressly or impliedly, that in the
performance of that service he will be subject to the other's control in a
sufficient degree to make that other master
iii.
The other provisions of the contract are consistent
with its being a contract of service. Control was associated with power of the
employer to decide things to be done, the way in which it shall be done, the
means to be employed in doing it, the time when and the place where it shall be
done
However, in the same
case it was suggested that contract for service (sole trading or
businesses) occurs when a contractor hires his own employees, provides and
maintains his own tools or equipment; the contractor paid by reference to the
volume of work done; have invested in the enterprise and bore the financial
risk; have the opportunities of profit or the risk of loss; and the
relationship is not permanent
Employment income
An individual’s
income form an employment is the gains or profits of the individual from the
employment for the year of income
Section 7 of the Act
provides the authority to charge income tax on the income of an individual form
an employment for the year of income and payments to be included and excluded
in calculating income from employment.
The income arising
in respect of any remuneration form an office or employment held by an
individual is gains or profits of the employment of the individual. Provided
that the remuneration is referred to the employment of the individual with the
employer, it will not matter whether the remuneration is for past, present or
prospective employment.
Payments to be included in calculating the income
form an employment
(INCLUSIONS)
a) Payments of wages, salary, payment in lieu of leave, fees, commissions,
bonuses, gratuity or any subsistence travelling entertainment or other
allowance received in respect of employment or service rendered;
b) Payments providing any discharge or reimbursement of expenditure
incurred by the individual or an associate of the individual;
c) Payments for the individual's agreement to any conditions of the
employment;
d) Retirement contributions and retirement payments;
e) Payment for redundancy or loss or termination of employment
f)
Annual director’s fees payable to a director other
than a full time service director
Note: Full time service director means a person at
a managerial position and is in full time service in a corporation
g) Benefits in kind quantified in accordance with section 27 of Income Tax
Act,2004
Allowances
The Act provides to
charge tax payments of any subsistence, travelling, entertainment or other
allowance received in respect of employment or services rendered. However
allowances that represent solely the reimbursement to the recipient of an
amount expended by the recipient wholly and exclusively in the production of
the income are excluded in calculating gains or profits for an employment.
Many businesses bear
directly certain expenses of their employees, and in case of directors senior
employees fixed expense allowance is often paid in addition to the salary.
Where individual disbursements in the exercise of the employment are borne or
reimbursed by the employer the disbursements are not treated as forming part of
the emoluments of the employee, although they may have the effect of saving the
employee’s expense or providing an amenity. But where the allowance is
excessive of the actual expenditure amount the excess is assessable and forms
part of the emoluments, in which case the employee can deduct in calculating
the come from the employment the portion of the payment qualifying as an
expense wholly and exclusively incurred in the production of the employee’s
income for the employment. Materiality of the amount in excess shall be
considered in deciding whether it shall be included
Business expenses and allowances
Special arrangements
may be agreed between an employer and the employee that certain expenses
including travelling expenses and allowances for the cost of meal and
accommodation will have to be provided by the employees themselves when working
away from their normal base. Allowances within the terms of such arrangements
do not have to be included in calculating the employee’s monthly pay. If the
employee carries out a substantial part of the duties at the permanent business
address of the employer, that address is the normal base for the employee’s
purposes. Otherwise normal base is the place, at which the duties are carried
out such as filming location or studio.
Foreign service Allowance
Where any allowance
to any person in the service of the Government of the Untied Republic is
certified by the Treasury to represent compensation for the extra cost of
having to live out of the United Republic in order to perform the person’s
duties, that payment (foreign allowance) is not regarded as income for income
tax purposes. Foreign Service allowances include educational for children of
diplomats serving overseas.
Board member sitting allowance
Sitting allowance
payable to a member of a board of directors of a public institution is
reimbursement or compensation for the extra costs incurred by the member in
order to in order to perform the member’s board duties. Such allowance is not
taxable except for a full time director
Payment of gift – gratuitous payments
Gratuitous payments
may be described in simple terms as a payment or transfer made where the payer
of transferor is under no legal obligation to do it. A gratuitous payment may
have no direct connection with employee’s remuneration or employment at all,
and therefore not in the nature of an emolument. The fact that there is a link
between the payment and the employment, and that the payment would never have
been made but for the employment, is not sufficient to render the payment
taxable. This type of payment is being made for personal attributes of the
employee, rather than performance of the employee’s services for example
turning a forgotten cell phone to the respective owner and the owner feels
obliged to make a gratuitous payment for this exemplary act. The payment will
however, be taxable on the employee if it is made to the employee as a reward
for or in return for acting as or being an employee.
Gifts and voluntary payments made by employers
Gifts and voluntary
payments made by an employer or an associate of the employer to or on behalf of
the employee with definite reference to the employment held by the recipient
and by virtue of the employee’s office are taxable.
Gifts in kind
Gifts in kind to
employees are not assessable if the gifts cannot turn into money; the employee
is director or higher paid employee when the cost of the gift to the employer
will be the value of the gift of the employee.
Gift for special services
Gift for special
services will be taxable if they are received in respect of an office or
employment notwithstanding that there is no enforceable right to receive after
the employment has terminated and that they are paid by way of gift. Payments
made, however, not in virtue of the office or employment but by way of
testimonial or in recognition of the personal qualities of the recipient will
not be taxable.
Tips
Employees in certain
trades receive tips which form a substantial part to their income. The payments
of tips received from received for the employer or a third as a reward for
services rendered in the course of the employment are taxable. Payments given
as a present in appreciation of the recipients’ personal qualities, such as
faithfulness, and consistency and readiness to oblige, would not be taxable
Prizes and incentive schemes
Under an incentive
scheme, prizes may be employer to the employee, for the efficient performance
of their work, such as for time- keeping, sales, etc. such payments are taxable
on the employees.
Payments to be excluded in calculating the income
form an employment
(EXCLUSIONS)
In calculating an
individual's gains or profits from an employment, the following shall be
excluded -
a)
Exempt amounts
These are income in which income tax has been specifically exempted
under the income tax act 2004, they are found under SECOND SCHEDULE of the
Income Tax Act, 2004.
b)
Final
withholding payments
These are the payment in which tax has been deducted at the source and
the tax so deducted satisfies the tax liability. Since tax has been deducted
and that tax is enough then there is no need to included in employment income
c)
Cafeteria services.
Cafeteria services should be excluded in they meet the following
conditions
a) They are provided on non discriminatory basis and
b) They are provided on the employer’s premises
d) Medical services, payment for
medical services, and payments for
insurance for medical services are excluded if
both of the following conditions hold
a)
Available with respect to medical treatment of the
individual, spouse of the individual and up to four of their children; and
b)
Made available by the employer non-discriminatory basis
e)
Any
subsistence, travelling, entertainment or other allowance that represents
solely the reimbursement to the recipient of any amount expended by him wholly and exclusively in the production of his
income from his employment or services rendered.
f)
Benefits derived from the use of motor vehicle where the employer
does not claim any deduction or relief in relation to the ownership,
maintenance or operation of the vehicle.
g)
Benefit derived from the use of residential premises by an employee of the Government or any
institution whose budget is fully or substantially out of Government budget
subvention
h)
Payment providing passage of the individual, spouse of the individual and up to four
of their children to or from a place of employment which correspond to the
actual travelling cost where the individual is domiciled more than 20 miles
from the place of employment and is recruited or engaged for employment solely
in the service of the employer at the place of employment.
i)
Retirement contributions and retirement payments
exempted under the Public Service Retirement Benefits Act
j)
Allowance payable to an employee who offers intramural private services to
patients in a public hospital.
k)
Housing
allowance, transport allowance, responsibility allowance, extra duty allowance,
overtime allowance, hardship allowance and honoraria payable to an employee or
the Government or its institution whose budget is fully or substantially paid
out of Government budget subvention and
l)
Payment that it is unreasonable or administratively impracticable for the employer to account for or to allocate to
their recipients.
Except for payments for redundancy or loss or
termination of employment income arising from an employment of an
individual is chargeable for the year of income of payment and accounted for on
cash basis.
BENEFITS IN KIND
What are benefits in kind?
Where an employer
makes payment for the personal needs of an employee through providing the
employee with goods or services (as opposed to money) these are called benefits in kind. Taxable benefits in
kind typically include those benefits which are for the personal use or
consumption needs of the employee (e.g. employer providing housing for
employee, employer providing for education of the employee’s children, employer
giving goods or services free or at a cost lower than the market value to the
employees)
QUANTIFICATION OF BENEFITS IN KIND
This is the process
of determining the monetary value of the benefits in kind for tax purposes
General principle of quantification of benefits in
kind
The value of benefit
in kind is quantified by the market value of the benefit that means the money
that another person would have to pay on the market to receive the same good or
service.
Apportionment of In-kind Benefits
Where a payment or
benefit to be included in calculating a person’s income (such as income from
employment) is not easily attributed to a particular month (such as the use of
a motor vehicle or house) then according to the act and regulation the amount
shall be treated as paid to the person proportionately over each month during
which the payment or benefit is provided.
Generally, benefits
in kind are valued on market values of the benefits, but with exception of car
benefits, beneficial loans and house benefits. These three
benefits have specific approaches concerning their valuations
SPECIFIC BENEFITS IN KIND
These are benefits
in kind which needs special calculations of their monetary value as provided
under section 27 of the Income Tax Act, 2004. These are
i.
The use of Motor vehicle benefits
ii.
Loan benefits
iii.
Housing benefits
Provision of an employer’s motor vehicle for
personal use of the employee
The private use of
motor vehicle during a year of income provided in return for services by way of
employment is taxable on the employee. The quantification of the said car
benefit is provided by the fifth
schedule to the income tax Act 2004 as hereunder:
Engine size of vehicle
|
Quantity of Payment
|
|
Vehicle less than five year old
|
Vehicle more than five years old
|
|
Not exceeding 1000cc
|
Shs. 250,000/=
|
Shs. 125,000/=
|
Above 1000cc but not exceeding 2000cc
|
Shs. 500,000/=
|
Shs. 250,000/=
|
Above 2000cc but not exceeding
3000cc
|
Shs. 1,000,000/=
|
Shs. 500,000/=
|
Above 3000cc
|
Shs.1,500,000/=
|
Shs. 750,000/=
|
In addition,
benefits from the use of motor vehicle enjoyed by an employee is excluded from
the income of the employee where the employer does not claim any deduction
(expenses for running the vehicle ) or relief (tax allowance for wear and tear)
in relation to ownership of the said vehicle. Since the Government does not pay income tax from business
activities that are the functions of government it does not claim deductions
and hence government employees do not
pay tax on this benefit.
The age of the motor
vehicle is calculated from the date of the first registration of the vehicle in
Tanzania.
Loans provided in return for services.
Where an employer
provides a loan to the employee and where the term of the loan is twelve months
or more and the aggregate amount of the loan and any other similar loans
outstanding at any time during the previous twelve month exceeds three months
basic pay, with no interest or interest rate below the statutory rate; the
foregone interest amount on the loan is a taxable benefit to the employee. The
benefit for the year of income is quantified as the difference between the
interest the employee pays (if any) and the interest that would have been paid
using the statutory interest rate applicable during the year of income.
Statutory rate in relation to a calendar year means the central bank of
Tanzania (BOT) discount rate the start of the year.
Note: Loan benefit is NIL if two conditions hold
1. The term of the loan is less than
twelve months and
2. The aggregate amount of the loan
and any similar loans outstanding at any time during the previous twelve months
does not exceed three months basic salary.
Therefore the loan
benefit may be calculated using the following formula
Loan Benefit = P (rs
- re )
Whereby P=
Loan principle
rs = Statutory
rate
re = Employer’s
loan rate
Example one
Assume a Year of
Income 2009
Basic salary Tshs.
200,000 per month
Loan granted Tshs
400,000 payable in March, April and May 2009 i.e payable in three months.
No interest is
charged in the loan by the employer
Required
Compute the amount
to be included in the 2009 year of income as benefit in kind
Solution
Statutory rate in
relation to a calendar year means the BOT discount rate at the start of the
year.
(i)
Loan granted for a period of 3 month which is less
than a year
(ii)
Three months basic salary = Tshs. 200,000 x 3 =
Tshs 600,000
No benefit in kind
because the period for the loan is less than a year. Also, Tshs 400,000 of the
loan is less than Tshs 600,000 computed in (i) above.
Example Two
Mr. Joel has been
employed by Vodacom (T) Ltd as a marketing manager. During the year of income
2013, His employer provided him with a free interest loan amounting to Tshs. 15
mil. Payable in 18 months while his basic salary was Tshs. 3 mil. p.m Assuming
the statutory rate is 20% p.a., calculate the loan benefits enjoyed by Mr. Joel
Solution
Loan Benefit = P ( rs
- re )
Whereby P=
Loan principle
rs = Statutory
rate
re = Employer’s
loan rate
then P= 15,000,000/=
rs = 20%
re = 0% ( free interest loan)
Loan benefit =
15,000,000 (20%-0%)
Loan benefit = 3,000,000/=
Provision of residential housing (Housing benefits)
Benefit derived from
the use of residential premises by an employee of the government or any institution whose budget is fully or substantially
out of government budget funding is exempt.
On the other hand where an employer other than the government have provided an
employee with residential house, the value of housing benefit including any
furniture is calculated as the lesser of the annual market value of the rental
of the house; or the greater of 15% of the employees total income for the year
excluding the housing benefit component and the expenditure claimed as a
deduction by the employer in respect of the premises during the year of income.
Where an employee contributed an amount towards rent payment, the employee will
be entitled to a credit of the amount paid by him during computation of the
taxable housing benefit.
Note
The value of
housing, including any furniture or other contents, is calculated as the lesser
of
(i)
The annual market value of the rental of the house;
or
(ii)
The greater of 15% of the employee’s total income
for the year excluding the housing benefit component and the expenditure
claimed as a deduction by the employer in respect of the premises during the
year of income.
PROCEDURES OF DETERMINATION OF THE HOUSING BENEFITS
In calculating the
housing benefits the following items should be calculated first
i.
Total income of the person before housing
ii.
Amount claimed by the employer with respect to that
house
iii.
Rental market value of the house
iv.
Amount contributed by the employee as token rent
STEPS:
a. Compare 15% of the total income of the employee before housing and the
amount claimed, then take the greater
b. Compare answer (a) above with the market value of housing then take the lesser
c. Deduct the answer obtained from the step(b) above by the amount paid by
the employee as rent
Example 1
Where an employer
provides residential housing to the employee whose salary is shs. 12,000,000/=
for year, for which market rental value is shs 960,000/= per year and the
employer claims a deduction of shs 1,080,000/= per year housing benefit is
calculated as follows:
Steps:
1.
Compare 15% of Tshs.12,000,000/=
which is 1,800,000/= vs 1,080,000/= (
amount claimed by the employer) than take the greater The greater is Tshs. 1,800,000/=
2.
Compare Tshs 1,800,000/= (answer
from step 1. Above) VS Market value which is Tshs. 960,000/= and then take the
lesser
The lesser is Tshs. 960,000/=
3.
Deduct the amount contributed by
the employee. In this case nothing is paid by the employee and hence Housing
benefit is Tshs 960,000/= per year
or Tshs 80,000/= per month
Example 2
A company had one
employee during the year of income and the following were the employee’s monthly
emoluments.
Basic salary Tshs
400,000
Transport allowance Tshs 250,000
Lunch allowance Tshs 150,000
Medical allowance Ths 50,000
Total taxable pay Tshs 850,000
Example 3
Referring to
remuneration details in example 2
Assuming that an
employee was housed by his employer freely. Suppose the market value of rental
at that area was shs 200,000/= per month and the expenditure claimed by the
company for that premises was 150,000/=
Solution
(i)
Compare 15% of total emoluments (excluding housing
benefit) with expenditure claimed is 150,000/= you take 150,000/=
(ii)
Compare the market value which is 200,000/= and
150,000/= take the lesser which is 150,000/=.
Tax computation
Refer example 2
total emoluments Tshs 850,000
Add housing benefit Tshs 150,000
Total Tshs
1,000,000
Refer (a) above
Assume that the
employee contributed shs. 50,000 as rent, the housing benefit will be:-
Solution
Housing benefit
computed in (a) above Tshs
150,000
Less amount paid by
employee Tshs 50,000
Total Tshs
100,000
Example 4
Refer to
remuneration details in example 2
Beside the
emoluments stated in example 2, the employee received the following benefit:
(i)
A new self drive car for private use, which is 3000
cc. The company claims expenditure on the car maintenance and ownership against
their taxable income
(ii)
Loan advance of shs 3,000,000 payable in 24 monthly
instalments and free of interest. (assuming the statutory rate in relation to
the calendar year was 12% p.a charged on total loan)
(iii)
Other benefit- electricity 50,000pm
-Water 20,000pm
Solution
Total emoluments per
example 2 850,000pm
Add car benefit
Annual (cc 3000) = 1,000,000
Per month = divided
by 12
Per month = 83,333
Loan interest benefit
= P (rs - re)
Loan interest
benefit = 3,000,000(12% - 0%)
Loan interest
benefit = 360,000/= per year i.e.
360,000/12 = 30,000/= per month
Other benefits
Electricity 50,000
Water 20,000
Total taxable income 1,033,333 per month
Retirement contributions
Under the provisions
of s.5(1) of the ITA read together with s. 61 (1), retirement contributions by
individual employees to approved retirement funds, subject to the limit of the
lesser of actual contribution or the statutory amount, are not taxable. (For
the purposes of section 61(2) of the Act, the statutory amount is Shs.
2,400,000)
This means when
calculating the employee remuneration one has to exclude that portion of the
statutory social security contribution. In Tanzania up to now there are four
approved social security schemes. Every employer is under the local obligation
to register with the relevant approved fund for the purpose of submitting
statutory employee’s social security contributions.
Determination of Employee’s Net Income
Net income refers
the employee’s take home amount; this is arrived at after subtracting all the
statutory and other deductions which include among others income tax and
statutory social security contributions. As mentioned before in this paper,
both nonresident and resident individual employee’s income tax liability is
calculated on annual basis though payable on monthly basis while it is being
earned (pay as you earn) as income payable above, for a non resident employee
the income tax rate is 15% of the gross income payable which the employee has
earned form Tanzania only; this rate is a final withholding and satisfies the
income tax liability of said employee. Whereas for the resident employees
income tax is payable in accordance with the applicable individual income tax
rates
Obligation of the employer to withhold tax
The income tax
chargeable on employment income is operated by withholding scheme. Under the
provisions of s.81 of the ITA every resident employer is required to
withholding income tax upon payment of employment income to an employee.
Furthermore the employer shall remit to the Tanzania Revenue Authority the
income tax withheld from employees remunerations within seven days from the
end of the month during which the
monthly remuneration is paid as is required under the provisions of s. 84 of
the ITA. It should be noted that failure to observe this legal requirement
renders the employer liable to the tax liability plus the accruing interests.
Primary and secondary employment
It is common now
days to find employees who have more than one source of employment income.
These may include individuals with part time employments with the common
example of professionals to include accountants, auditors, doctors, lecturers,
ICT expert’s etc. Where an employee has two or more employments at the same
time both or all employers are required to withhold income tax. Paragraph 18 of
the income once of these employments to be the employees primary employment and
the remaining employments shall be secondary employment(s). Furthermore,
primary employer will withhold income tax accordance to the individual tax
rates as income tax and the secondary employer(s) is required to withhold
income tax at the highest individual tax rate i.e 30% for each payment to the
employee that constitutes income from employment.
OTHER EMPLOYER’S OBLIGATION
Statement of Tax withheld
Under the provision
of 84 of the ITA every employer who is obliged to withhold tax form payments to
their employees is required to file with the commissioner for domestic revenue,
a duly completed statement of Tax withheld 30 days after the end of six months
calendar period. The employer must include in the said statement employees for
which employment with the employer constitutes a secondary employment. For this
purpose an employer must enquire form his employees (for whom he is a primary
employer at a maximum of six- monthly intervals) whether the employee has
another employment.
Provision of withholding certificate
Every year an
employer who has withheld tax or is liable to withheld tax under the PAYE
system must prepare and serve on their employees a certificate stating the
amount of employment income paid during the year and the amount of tax withheld
from the payment. This is a requirement under the provisions of s. 85 of the
ITA; the statement must be served on each employee by 30th January
following the end of the year. If the employment ends during the year the
employer must serve such a certificate on the employee within 30 after
cessation of the employment. The withholding certificate issued by the employer
as per above paragraph should be in prescribed format.
Imposition of skills and Development levy
Skills and
development levy (SDL) is tax chargeable to employers imposed in accordance
with the vocational education and training act, 1994, as amended by the finance
act No. 14 of 2001. The levy is a revenue source for the government for
financing of vocational training to empower Tanzanians with skills required for
self.
Employment The levy is payable
by employer who has in his employment four
or more employees. It is charged at 6% on gross monthly emoluments (Including retirement contribution) and it
is payable on or before the seventh day following the end of the respective
month to the commissioner for domestic revenue. Under the provisions of the
said law” Gross monthly emoluments” are all payments made to employees by the
employer in reward for the services rendered. They include wages, salary, leave
pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity and
any subsistence, travelling, entertainment or any other allowances which are
paid to employees by an employer in respect of his employment or services.
However, allowances which are paid to employees for the purpose of getting the
employers work accomplished are not part of the gross emoluments if expended wholly and exclusively for that
purpose. The levy is also imposed on emoluments paid to casual laborers and
temporary employees. Certain employers are exempt from payment of skills and
development leave. These include; the central government, the local government,
religious institutions, diplomatic missions including the united Nations
Agencies, Training and Education institutions, charitable organizations and
employment in farms
TAXATION OF TERMINAL PAYMENTS
Payment for
redundancy or loss or termination of employment is taxed as provided for under
section 7(4) of the Act. Any such payment received in respect of a year of
income which expired earlier than five year prior to the years of income in
which it was received or which the employment ceased, if earlier such payment
shall be allocated equally between the years of income in which it was received
or in which the service ceased and the five years immediately preceding such
year of income. Each portion allocated to any such year of income shall be
deemed to be income of that year of income in addition to any other income of
that year of income. Therefore, any terminal payment in respect of a year of
income which is earlier than six years from such payment is received or when
services cease, if earlier, shall be spread back over a period of six years.
In such payments, a
sum is normally paid by way of compensation for loss or surrender of an office
or employment. The fact that the payment is made in a lump sum does not remove
the payment for liability to income tax, however for a payment to enjoy the tax
treatment under section 7(4) there must be a genuine, and not merely a sham end
of the original employment or cessation of services. To constitute a genuine
retirement, the employee must relinquish the office under such termination
without an intention of resuming it. However, provided there is a bona fide
termination, an employee may be re-employed by the ex-employer.
Example one
An employee is paid
by the employer Sh.28,000,000/= for termination of the employment in the year
2007 when the employment actually ceased. The payment relates to years 1996 to
2007, inclusive and is allocated by the employer as Sh. 2,000,000 for each of
the years 1996 to 2002 and Sh. 2,500,000 for 2003, and 2004 and Sh. 3,000,000
years 2005, 2006 and 2007. Allocate the terminal payment for calculating income
tax of the employee.
Solution
For calculating the
income of the employee the terminal payment is treated as follows:
The employer has
allocated the payment as follows
Year
|
1996
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
Amount
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
2.5m
|
2.5m
|
2.5m
|
3.0m
|
3.0m
|
3.0m
|
·
Under section 7(4) the income for years 1996 to
2002 (shs. 12.0m) is to be allocated equally over the prior six year to 2007
i.e.Sh.2.0m for each year.
·
The allocation for calculating tax purpose is as
follows
Year
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
Income spread back
(Shs.)
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
2.0m
|
Allocated (Shs)
|
2.0m
|
2.5m
|
2.5m
|
3.0m
|
3.0m
|
3.0m
|
Total reallocated (terminal payment (Shs.)
|
4.0m
|
4.5m
|
4.5m
|
5.0m
|
5.0m
|
5.0m
|
The income as
reallocated is assessable in the six years between 2002 and 2007, additional to
any income previously declared or assessed.
No terminal payment
will be assessed for years 1996 to 2001
COMPENSATION FOR THE TERMINATION OF CONTRACT
What is compensation?
Compensation for the termination of any contract
of employment or service...” Should be taken to mean any payment made for the
premature termination of a contract even if the contract itself envisages a
right to terminate it prior to expiry.
The provisions of S. 7 (5) a, b, and c of the
Income Tax Act. 2004 provide for limitations to the amount of compensation to
be assessed and prescribe such methods of spreading that amount.
•
The limitations of such amount pay some regards to the argument that,
compensation for loss of office may sometimes contain capital elements in
respect of a permanent or impairment of earning power.
•
The spreading forward of compensation is in respect of loss of future
earnings and does not represent additional remuneration for the past years.
Payments received as
the termination of any contract of employment or services rendered, whether or
not provision is made in such contract for the payment of such compensation is
taxed in accordance with the provisions of section 7(5) as follows:
A.
SPECIFIED TERM CONTRACT S.7 (5a)
Doesn’t matter whether contract provide for
compensation or not. Gain or profit from employment or service
rendered, shall not exceed the amount which the employee would have earned
had he/she remained in the employment to the date of expiry as specified in
the contract.
Such an amount shall be spread over the period
between the date of termination and the date of expected expiry as specified in
the contract.
Procedure:
1. Find the total compensation paid. Say “C”
2. Find how much would have been received if
he/she continued being employed for the whole specified period. Say “S”
3. Compare C & S; If C > S, then don’t
assess the full amount of C rather a portion of C = S. But if S > C, assess
the whole amount of C. Therefore the assessed amount “A” will be the lesser of “S” and “C”
4. Find the number of months representing unexpired
period. Say “U”
5. Divide the amount decided (3)i.e. “A” above by U.
6. Multiply the rate obtained under (5) above by
number of months remaining unexpired in each year of income falling within the
unexpired period to obtain the amount assessable in each of those years
respectively.
7. Add the amounts so allocated to each year under
(6) above to any other income earned by the person to compute the total taxable
income.
EXAMPLE
Mr. Mitomingi entered into contract of
employment with Tusichoke Co. L.t.d. A resident company as whole time Director.
The contract specified that he was to serve the company for three years
commencing from 1/1/2004. However due to certain misunderstandings between him
and the company, they latter terminated his employment w.e.f. 1/1/2005. He was
paid Shs. 10,000,000 by cheque dated 5/1/2005. His salary was supposed to be
Sh. 450,000 p.m. for the whole period of contract. Mr. Mitomingi was never
employed again and had no other source of income.
Required:
Calculate the taxable income for the year 2004
to 2006.
UNSPECIFIED
TERM CONTRACT BUT THE CONTRACT PROVIDES FOR COMPENSATION S.7(5b)
Where the contract of employment is for
unspecified term (indefinite), and if the employment/services are terminated at
any time, and certain sum shall be paid as compensation for the termination. In
this case the employee is in advantage because he/she knows well in advance of
the amount to be paid.
In case of termination the whole amount paid
shall be taxable(Assessed) by spreading over the period starting the date of
termination at a rate equal to the rate per annum of the gain/profit
from such contract received immediately before termination.
Procedures:
1. Find his last
remuneration on the date of termination of his employment.
2. Determine his yearly remuneration on the basis above.
3. Ignore the terms of contract of employment relating to
future remuneration had he
remained in the employment.
4. Assess the whole
amount as if the employment had
not been terminated at the annual rate obtained in (3) above in every year
until the whole amount is exhausted.
5. Add the amount obtained (4) above to any other
income received in those years, for the purpose of computing the total taxable
income.
EXAMPLE ONE
Mr. K had been employed by Tapenade and Co.
L.t.d since 1/1/2006 for an unspecified term. The term of contract include the
following:
-
Salary for the period btn, 1/1/05 – 31/12/05, Sh.1,000,000.
-
Salary for the period btn, 1/1/06 – 31/12/06, sh.2,000,000.
-
Salary for the period btn, 1/1/07 – onwards, sh. 3,000,000.
-
Compensation of sh.9,000,000/= would be paid to him if the employment was
terminated at anytime.
Due to his bad conducts the employment was
terminated w.e.f. 30/6/07 and he was paid sh.9,000,000/= on same date. Assuming
that he was never employed and had no other source of income.
Required:
Compute his taxable income for the relevant
years.
EXAMPLE TWO
An employee had a
contract of employment for unspecified period which provide for compensation on
termination. The contract was terminated on 31st December, 2006.
During the year 2006 the employee was receiving gross remuneration of Sh.
18,000,000. On 4th January, 2007 the employee received as
compensation for the termination of contract a payment of Sh. 58,000,000
Suggested solution
For purpose of
calculating the employee’s income tax, the payment will be allocated evenly for
the period immediately after such termination at the annual rate of the income
the employee received immediately before the termination as follows:
Salary for year 2006 Sh. 18,000,000
Compensation payment
year 2007 Sh. 18,000,000
Compensation payment
year 2008 Sh. 18,000,000
Compensation payment
year 2009 Sh. 18,000,000
Compensation payment
year 2010 Sh. 4,000,000
The compensation
payment of Sh. 58,000,000 will be assessed for years 2007, 2008, 2009 and 2010
as shown above.
UNSPECIFIED TERM CONTRACT AND CONTRACT DOES NOT
PROVIDE FOR COMPENSATION
If the contract is for unspecified term, but
does not provide for compensation thereof.S.7 (5c). Employee is at a
disadvantage than one falling under S.7 (5b), who knows in advance the sum as
compensation.
The whole amount shall be taxable only if it is
less than 3years remuneration of the person computed on the basis of his annual
gain/profit from such contract received immediately before termination.
} The amount assessable shall be spread forward
Procedures
1. Find out his remuneration on the date of
termination of employment/service.
2. From the above, find out his yearly
remuneration.
3. Ignore the other terms of contract relating to
the period subsequent to the date of termination.
Then assess as follows:
-
Calculate 3 years remuneration and if the compensation is equal to or
less than the figure so computed then assess the whole compensation.
-
Calculate 3 years remuneration and if the compensation is greater than
the former then assess only such part of the compensation as it is equal to 3
years remuneration.
-
The excess is exempt.
EXAMPLE
The terms of contract of employment between Mr.
B and the XYZ Co. Ltd was for unspecified term and did not provide for any
payment of compensation whatsoever on the termination of employment/service. He
had just received his normal increment from shs. 4,500,000/= to shs 5,000,000=
p.m. When the company terminated his employment on the ground that, there was
evidence that he had been leaking out certain business secrets to a certain
rival company. Shs. 200,000,000/= was paid to him on 30/6/2005 the date from
which the termination became effective. Since then Mr. B decide to start his own
business which earns him approximately (for income tax purposes) Shs.25,000/=
p.a. From the year 2006. he has no other source of income.
Required:
Compute Mr. B taxable income for the years 2005
to 2007
COMPREHENSIVE EXAMPLE
Mr Ndikumana had
been in the employment with Bahali and brother a resident partnership since
1999. He received the following amounts as salary;
Tshs 1,200,000 per
month between 1/1/1999 to 31/12/1999
Tshs 1,400,000 per
month between 1/1/2000 to 31/12/2000
Tshs 1,600,000 per
month between 1/1/2001 to 31/12/2001
Tshs 2,000,000 per
month between 1/1/2002 to 31/12/2004
Tshs 2,500,000 per
month between 1/1/2005 to 30/06/2007
Tshs 3,000,000 per
month between 1/7/2007- onwards
The partnership
terminated his employment on 30/9/2007 following a scandal in the partnership
involving him. It was found out that the termination was necessary to protect
the partnerships reputation. Mr Ndikumana had no other income after termination
of employment.
Required:-
Compute Mr Ndikumana
taxable income for the year of income 2005 and subsequent year under each of
the following assumptions
(i)
His contract was for a fixed term 15 years and he
was paid shillings 120,000,000 as compensation on the date of termination.
(ii)
His contract was for an unspecified term and
provided for compensation of shillings 12,000,000 on terminations.
(iii)
His contract was of an unspecified term and did not
provide for any compensation for the termination of employment but compensation
amount as (i) above was paid to him.
Suggested solution.
(i)
His contract was for a fixed term of 15 years
Compensation received = 120,000,000
Terms of contract = 15 years form 1/1/1999 to 2013
Terminated on 30/9/2007
The unexpired period = 1/10/2007 to 31/12/2013 = 75 months
The amount which could have been received through the unexpired period
3,000,000 x 75 = 255,000,000
Compare with compensation received and tax the lesser, I e 120,000,000
Compensation is taxable in the unexpired period as follows:
120,000,000/75=1,6000,000 per month
Year of income
|
Salary
|
Compensation
|
Total taxable income
|
2005
|
30,000,000
|
NIL
|
30,000,000
|
2006
|
30,000,000
|
30,000,000
|
|
2007
|
24,000,000
|
4,800,000
|
28,800,000
|
2008
|
NIL
|
19,200,000
|
19,200,000
|
2009
|
NIL
|
19,200,000
|
19,200,000
|
2010
|
NIL
|
19,200,000
|
19,200,000
|
2011
|
NIL
|
19,200,000
|
19,200,000
|
2012
|
NIL
|
19,200,000
|
19,200,000
|
2013
|
NIL
|
19,200,000
|
19,200,000
|
(ii)
His
contract was an unspecified term and provided for compensation of shillings
12,000,000 on terminations
Compensation received = 12,000,000
Taxable at the rate of 3,000,000 per month in the years immediately
after termination.
YEAR OF INCOME
|
SALARY
|
COMPENSATION
|
TOTALTAXABLE INCOME
|
2005
|
30,000,000
|
NIL
|
30,000,000
|
2006
|
30,000,000
|
NIL
|
30,000,000
|
2007
|
24,000,000
|
9,000,000
|
33,000,000
|
2008
|
NIL
|
3,000,000
|
3,000,000
|
(iii)
His contract was of an unspecified term and did not
provide for any compensation for the termination of employment.
Compensation received = 120,000,000
Remuneration at the time of termination = 3,000,000
Three years
remuneration = 3,000,000 x 36 = 108,000,000
Compare with
compensation received and tax the lesser, i. e 108,000,000
Taxable at the rate
of 3,000,000 per month in the years immediately after termination
YOI
|
SALARY
|
COMPENSATION
|
TOTAL TAXABLE INCOME
|
2005
|
30,000,000
|
NIL
|
30,000,000
|
2006
|
30,000,000
|
30,000,000
|
|
2007
|
24,000,000
|
9,000,000
|
33,000,000
|
2008
|
NIL
|
36,000,000
|
36,000,000
|
2009
|
NIL
|
36,000,000
|
36,000,000
|
2010
|
NIL
|
27,000,000
|
36,000,000
|
INDIVIDUALS TAX RATE APPLICABLE IN 2015/2016
The total income of a resident
individual for a year of income shall be taxed at the following rates:
TOTAL INCOME
|
RATE OF TAX PAYABLE
|
Where total income does not
exceed Tshs. 2,040,000/=
|
NIL
|
Where total income exceeds
Tshs. 2,040,000/= but does not exceed Tshs. 4,320,000/=
|
11% of the amount in excess of
Tshs. 2,040,000/=
|
Where total income exceeds
Tshs. 4,320,000/=but does not exceed Tshs. 6,480,000/=
|
Tshs.250,800/= plus 20% of the
amount in excess of Tshs.4,320,000/=
|
Where total income exceeds
Tshs. 6,480,000/=but does not exceed Tshs. 8,640,000/=
|
Tshs. 682,800/= plus 25% of the
amount in excess of Tshs. 6,480,000/=
|
Where total income exceeds
Tshs. 8,640,000/=
|
Tshs. 1,222,800/= plus 30% of
the amount in excess of Tshs. 8,640,000/=
|
REVIEW QUESTIONS
QUESTION ONE
a) Explain the meaning of “an employment”
b) Mr. Kizu has just been appointed as a financial consultant of MTUMWEMA
Ltd for a contract of one year and he will be stationed at MTUMWEMA Ltd’s
premises for the whole period of the contract. His terms of the contract
include a weekly remuneration bases on hours that Mr. Kizu will be working at
MTUMWEMA Ltd.
Required:
Distinguish between
“a contract of service” and “contract for service” using the information above.
QUESTION
TWO
Rabia & Assey
Ltd employed Ms. Malaika Mukoba as the company human resource officer with
effect from 1st September 2009. By the time the company submitted a
statement of employment income for year 2010, the following information was
revealed to her as her annual emoluments:
·
Basic annual salary TZS 6,000,000/=
·
Transport allowance TZS 2,500,000/=
·
Lunch allowance TZS 1,500,000/=
·
Medical allowance TZS 1,000,000/=
The employer housed
her for free. The annual market rental value of that area was TZS 4,000,000/=
and the expenditure claimed by the company per annum foe that premise was TZS
1,500,000/=. The contribution made by the employee was TZS 500,000/= as rent.
Besides the emoluments stated above, the employee has the following benefits:
·
A self driven car for private use, which is 3000cc,
brand new. The company claims expenditure of car maintenance.
·
Other benefits included electricity TZS 30,000/=
and water TZS 25,000/= per month in her office.
Though her
employment services were terminated on 31st December 2010, the
company paid her TZS 30,000,000/= as termination benefits (Compensation for
lost of employment). Other income she received in 2010 was TZS 300,000/=
interest from MBY Bank, TZS 1,500,000/= - lease amount from MSK company for the
building she leased to the company since 2009.
Required:
Calculate the total
income for Ms. Malaika Mukoba for the year of income 2009.
QUESTION FIVE
Mr. Li Ching Chinese
expert was employed by the Nuwe Mining Corporation (NMC) a private resident
company on expatriate terms, to construct the Rungwe Coal Mine complex in Mbeya
He came to the
United Republic of Tanzania on 1st February 2013 and started to work
with the company on the following day
a) He was being paid duty allowance of Tshs. 300,000/= per month and a
salary of Tshs. 600,000/= per month
b) For one month he was in China, he was working with the Government of
China which had paid him equivalent to Tshs. 500,000/= per month.
c) The firm provided him a car (3000cc, of 2011) from the day he arrived in
the United Republic. This was wholly used for employment.
d) For the first two months of his stay in the United Republic, he was
accommodated in a hotel. The firm paid a total of Tshs. 1,500,000/= for full
board.
After then, he was provided with a fully furnished house. The firm had
installed the furniture in the house which belonged to the NPC limited which
cost Tshs. 6,000,000/=. NMC was paying a monthly rent of Tshs. 800,000/= per
month for the house to NPC and was deducting token rent of only Tshs 50,000/=
per month from Mr Li Ching’s salary. Half of the house was used as an office,
and the company was entitled to claim repair and maintenance expenditure.
e) According to the contract of employment, he had a right of going on
leave once annually. However, due to his important role in the project, the
firm decided to pay him on 30.5.2013, Tshs. 1,000,000/= in consideration of him
foregoing his 2013 annual leave.
f) On several occasions he had, on behalf of the company, to tender some
consultancy services to the State Mining Corporation. As thus the employer
company paid him a token sum of Tshs. 500,000/= as appreciation for the
services as he gave the firm a considerable amount of revenue, in the form of
consultancy fees from the State Mining Corporation.
g) Water bills for the year totaled Tshs. 80,000/= and were fully met by
the employer. The bills stood in the name of the employer. Electricity bills
(which stood on the name of the employee) totaling Tshs. 50,000 were also met
by the company.
h) A night watchman earning Tshs. 80,000/= was employed by the company for
the house. However, he was only responsible for part of the house used for
employment purpose. This watchman was also provided with a house used by the
company
i) The company paid the following annual membership fees for him.
-
Tshs. 60,000 as membership fee to the Lion Hotel
swimming pool
-
Tshs 100,000/= as membership fee to Mining Experts
Club
-
Tshs. 10,000/= to Officers mess
-
Tshs. 200,000/= to the Safari Club
Though he was working in Mbeya, he used to come to DSM during the
weekends. The firm was also paying for his trip to and from Mbeya in which
Tshs. 2,300,000/= was used for those trips.
j) On the basis of his contract, the company provided him with free lunch
which was worth Tshs. 10,000 each and two crates of beer for each month. He had
taken only 30 lunches for 2013. A crate of beer was purchased at Tshs. 25,000/=
k) He was paid free interest loan of Tshs 20,000,000/= payable in 24 months
on 1st May 2013. Assume statutory rate is 15% p.a.
l) On one of the trips to DSM he toured Chui textile Mill, where he was
given complimentary of 6 pieces of ‘kitenge’ dressing materials each worth
Tshs. 5,000/=.
m) At the end of each year he was paid a gratuity of Tshs. 1,500,000/=.
Required:
From the above information, compute Mr. Li Ching taxable income for 2013
year of income.
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