[TOPIC 4] (Investment income, taxation - TZ)

TM 738: TAXATION (2015/2016)

By: Greyson Nyantamba.

TOPIC 4: DETERMINATION OF INVESTMENT INCOME

Section 9 of the ITA 2004 provides the mode of taxation of a person’s gains or profits from an investment for a year of income. Investment income is the gains or profits derived by a person from conducting the investment.

Investment

Means the owning of one or more assets of a similar nature or that are used in an integrated fashion, on similar terms and subject to similar conditions, including as to location and includes a past, present and perspective investment, but does not include a business, employment and the owning of assets, other than investment assets for personal use by the owner.

Investment asset

Means shares or security in a corporation, a beneficial interest in a non-resident trust and an interest in land and buildings but does not include.

a)     Business assets, depreciable assets and trading stock

b)    A private residence of an individual that has been owned continuously for three

years or more and lived in by the individual continuously or intermittently for a total of three years or more, other than a private residence that is realized for a gain in access of 15,000,000 shillings

c)      An interest in land held by an individually that has a market include of less than shillings 10,000,000 at the time it is realized and that has been used for agricultural purposes for at least two of the three years prior to realization

d)    Shares and securities owned by a resident person or a non resident person who either alone or with other associates controls  less than 25%  of the controlling shares  of the issuer company and listed on the DSE.

Income from an Investment

Income of a person from an investment for a year of income is the person’s gains or profits from conducting the investment for the year of income

A person whose activities consist of mainly in the making and holding of investment for the purposes of receiving return on that investment, like rent, interest dividends etc. and the principal part of whose come is derived there from is referred to as conducting an investment.

Amount to be included in calculating investment income (INCLUSIONS)

In calculating a person's gains or profits from conducting an investment for a year of income, the following amounts derived by the person from conducting the investment during that year of income shall be included:-

a)     Any dividend

b)    Distribution of a non resident trust

c)     Gain of an insured form life insurance

d)    Gains form an interest in an unproved retirement fund

e)      Interest

f)      Natural resource payment

g)     Rent or royalty

h)     Net gains from the realization of investment assets of the investment

i)        Amount derived as consideration for accepting a restriction on the capacity to conduct the investment

Amount to be excluded (EXCLUSIONS)

The following amounts shall be excluded in calculating gains or profits from conducting an investment:-

a)     Exempt amount

b)    final withholding payment

c)     Amount that are in calculating the person’s income from any employment or business

NOTE:

 The following are final withholding payments and therefore they should not be included in calculating the income from investment

a)     Dividends paid by -

                 i.            A resident corporation;

               ii.            Non-resident corporation to a resident individual

b)    Interest paid by financial institution to a resident individual where the interest is paid with respect to a deposit held with the institution

c)     Rent paid to a resident individual under a lease of land or a building and associated fittings and fixtures,

d)    service fees paid to a resident person that are subject to withholding

e)     payments made to non-resident persons (other than through a domestic permanent establishment of the person) that are subject to withholding

f)      Interest paid to a unit trust

Dividend of any entity

Means distribution by the entity to the extent that it is not payment of capital

Interest

Means a payment for the use of money and includes a payment made or accrued under a debt obligation that is not a repayment of capital, any gain realised by way of a discount, premium, swap payment or similar payment, amount treated as interest under section 32 of income tax act

Life insurance

Means insurance of any of the following classes:

a)     Insurance where the specified event is the death of an individual who is the insured or an associate of the insured.

b)    Insurance where-

i.        The specified event is an individual who is the insured or an associated of the insured or an sustaining personal injury or becoming incapacitated; and

ii.      The insurance agreement is expressed to be in effect for at least five years or without limit of time and is not terminable by the insurer before the expiry of five years except in circumstance prescribed by the regulations.

c)     Insurance under which an amount or series of amount is to become payable to the insured in the future; and

d)    Re-insurance referred to  (a) to (c) above

Gains of an insured from life insurance

The terms “gains of an insured form life insurance” is defined in section 60, for the purposes of that section, to means the extent to which proceeds from life insurance paid by an insurer exceed premiums paid to the insurer with respect to the insurance. Gains of an insured from life insurance shall be taxable on the insured where the gains are paid by a non- resident insurer. Gains paid by a resident insurer are tax empty on the insured

Therefore

GAINS = Proceeds paid – premiums paid

Tax treatment

Gains paid by NON RESIDENT insurer is TAXABLE

Gains paid by RESIDENT insurer is EXEMPT

Natural resource

Means minerals, petroleum, water or any other non - living or living resource that may be taken from lands or the sea;

Natural resource payment

Means any payment, including a premium or like amount, for the right to take natural resources from land or the sea or calculator in whole or part by reference to the quality or value of natural resources taken form lands or the sea;

Rent

Means any payment made by the lessee under a lease of a tangible asset including any premium and any other payment for the granting of the lease but excludes a natural resource payment and a royalty;

Royalty

Means any payment made by the lessee under a lease of an intangible asset and includes payments for-

a)      The use of another right to use, a copyright, patent, design, model, plan, secret formula or process or trademark.

b)    The supply of know-how including information concerning industrial, commercial or scientific equipment or experience

c)     The use of right to use, a cinematography film, videotape, sounds recording or any other like medium.

d)    The use of, or right to use, industrial, commercial or scientific equipment;

e)      The supply of assistance ancillary to a matter referred to in paragraph (a) to

f)      A total or partial forbearance with respect to a matter referred to in paragraph (a) to (e); but excludes a natural resource payment;

Trust

Means an arrangement under which a trustee holds assets but excludes a partnership and a corporation;

Distribution of a trust

Distribution of a non- resident trust or unit trust shall be taxable on the beneficiary of the trust. However distribution of a resident trust or unit trust shall be exempt on the beneficiaries.

Gains from a interest in a an unproved retirement fund

Gains form an interest in an unapproved retirement fund is defined in section 63 to means the extent to which retirement payment made by an unapproved retirement fund in respect of an interest in the dung exceed retirement contributions made to the fund in respect of the interest.

Gains from an interest in a n unapproved retirement fund are taxable on the payee if the gains are paid by non-resident fund and the gains are tax exempt if paid by a resident fund.

Gains = retirement payments- ret. Contributions

Treatment

•      Paid by non resident  is TAXABLE

•      Paid by resident person  is EXEMPT

Amount derived as consideration for accepting a restriction on the capacity to conduct the investment

In calculating the income of a person form an investment for a year of income any payment derived be the person as consideration for accounting a restriction on the capacity to conduct the investment shall be included.

Whether a particular amount is income received from an investment or a business

Whether or not a particular receipt is income received from an investment or profits arising from a business is a matter of facts and must be decided on the facts or each case. However there are a number of judicial authorities which give guidance in determining whether a particular piece of income is income from an investment or profit of a business.

Like royalty rent is usually an item of income received from an investment. However when rent in derived a conduction a business, the income is income form a business and not form an investment this positions was observed in the case of Rotunda Hospital Dublin v Coman

Net gains from the realization of investment assets

Net gains from the realization of an investment asset is the amount by which the sum of the incomings for the asset exceeds the cost of the asset at the time of realization. Subject to the confinement of the reduction in respect of foreign source loss net gains on the realization of investment assets for a year of income is arrived at taking into account the following reductions:

a)     The total of all losses from the realization of investment assets of the investment during the year;

b)     Any unrelieved net loss of any other investment of the person the year; and

c)      Any unrealized net loss for a previous year of income of the investment or any other investment of the person.

GENERAL PRINCIPLE

Expenses wholly and exclusively incurred in the production of the income of the investment are deductible calculating the taxable again or profits, but the cost of changing investment is not allowable deduction

NOTE:

Depreciation allowance is not to be granted in calculating income form an investment.

REALISATION OF INVESTMENT ASSET

A person who owns an investment asset is treated as realising the asset when the following conditions exists

When the person parts with the ownership of the asset including when the asset is:

–     Sold

–     Exchanged

–     Transferred

–     Distributed

–     Cancelled

–     Redeemed

–     Destroyed

–     Lost

–     Expired

–     Surrendered

THE COST OF THE ASSET

The cost of the assets of any person is the sum of:

•      Expenditure incurred by the person in acquiring the asset including where necessary expenditure on of construction, manufacture or production of the asset

•      Expenditure incurred by the person in altering, improving, maintaining, and repairing the asset

•      Expenditure incurred by the person in realising the asset

•      Incidental expenditure incurred by the person in acquiring and realising the asset and

•      Any amount required to be directly included in calculating the persons total income; or that is an exempt amount or final withholding payment of a person

But Cost of assets excludes

Consumption expenditure

Excluded expenditure

Expenditure directly deducted in calculating the persons income or that is to be included in the cost of the asset

For that purpose then:

•      Incidental expenditure means incurred by the person in acquiring or realising the asset includes advertising expenditure,Taxes, Duties and Other expenditure of transfer and expenditure of establishing, preserving, defending ownership of the asset includes also expenditure for the services of Accountants agents, auctioneers, broker, consultants, legal advisor, surveyor and valuer

INCOMINGS OF AN ASSET

Incomings of an asset of a person means amount derived by the person in respect of owning the asset including:

–     Amount derived from altering or decreasing the value of the asset

–     Amount derived under the asset including by way of covenant to repair or otherwise

–     Amount derived by the person in respect of realising the asset

Incomings of an asset excludes

•      Exempt amount (eg. Amount derived In respect of the asset that is not a business asset, depreciable asset, investment asset or trading stocks)

•      Final withholding payments

•      Other than in the case of trading stock, the amount to be directly included in calculating the person’s total income

CALCULATIONS OF GAINS AND LOSSES

Gain from realisation of investment asset is when

–     The amount of incomings exceeds the cost of the asset or liability at the time of realisation

Loss on realisation

·        Is the amount by which the cost of the asset or liability exceeds the sum of the incomings for the asset or liability at the time of realisation

Net gains from realisation

Is the sum of all gains from realisation of investment assets during the YOI Less:

–     Total losses from realisation

–     Unrelieved loss for the year

–     Unrelieved loss for the previous year

Foreign source losses

•      Foreign source losses should be deducted only against foreign source income from investment

Note:

Unrelieved losses means the excess of losses over gains from realisation of investment assets of the investment during the year reduced by the amount of excess that have been previously taken into account

INCOME FROM INVESTMENT

This is given by taking the

-         Total return on investment ( e.g. rent, dividends, interest etc.)

-         Deduct there from any income subjected to final withholding payments and exempt dividends and current expenses deductions

Then

   Add: Net capital gains (ie capital gains minus capital losses)

   Deduct: Any loss carry forward from the previous year

Note:

1.      Current expenses:These may be deducted if they are wholly and exclusively incurred in the production of investment income

2.      Expenditure incurred in deriving exempt amount and final withholding payments are not to be deducted

3.      Limits on capital gains:If the corporation makes a loss when selling an investment asset, it can offset only from the gains on selling investment assets

4.      Foreign losses: Foreign investment losses can offset only foreign investment income, losses on the sale of an investment assets can offset only against the sale of foreign investment asset

REVIEW QUESTIONS

Question one

Mrs. Zulfikar is a resident individual residing in Arusha. During the year of income 2005, she decided to sell her residential premise for Tshs. 64,000,000/=. This building was constructed for Tshs. 30,000,000/= in 2001 and remained vacant for the entire period. Before the sale of the building, she incurred a total of 8,000,000/= for painting and replacement of the roof. Moreover Jackson Law Chambers were hired to prepare the sale agreement for which she paid 3% of the selling price as legal charges. She also paid Tshs. 500,000/= to Duke selling agent who facilitated the sale of the building though the sale was also advertised eight times in one of the local news papers for Tshs.  400,000/=.

Apart from these transactions, Mrs Zulfikar also had small business for which during the year 2005 she earned a total of Tshs. 60,000,000/= as business income.

Required:

        i.            Compute the total Income of Mrs. Zulfikar for the year of income 2005.

Would your answer be different had it been that Mrs. Zulfikar is a non-resident person.

Question Two

Jane is a newly formed company carrying out fishing business. During the first year (2009) of operations it made the following transactions:

i.                     Received dividend from NANA Ltd a resident corporation amounting to TZS 6,000,000.

ii.                   Dividends amounting to TZS 3, 5000,000 were received from KWEMU Ltd, which is listed on the DSE, and owned 22% by TMBU Ltd a nonresident company.

iii.                 Dividends amounting to TZS 1,550,000 received from CHUCHUMA Company Ltd a resident company.

iv.                AADU has its office along Au Hassan Mwinyi Road, the office was underutilized. The company decided to rent the front office to Juma Bakari.

a shop businessman, who used it as a shop after paying TZS 800000 as rent

v.                  During the year the company received TZS 400,000 as rent from MR. James a Tanzanian, with respect of house occupied by him situated at Changanyikeni - Dar es Salaarit

vi.                Also the company received royalty from Madengu Ltd amounting to TZS 400,000 out of lease of video tapes used for promotion.

vii.              During the year, AADU sold 6 hectares of land which was at KUNDUCHI and received TZS 300 million. This land was purchased for 2,000 in 1970. Three years prior to its sales, this land has been used for a agricultural land.

In addition to that transaction it earned business profit of TZS 100 million.

REQUIRED:

By applying the relevant provisions of the ITA, 2004 compute the investment income, Total income and Tax Payable of the company for the years ending

2008.

Question Three

a) SETC (T) LTD is a non-resident corporation with the following sources of income ended December 31, 2010:

i.           Sold shares of MAJIB Ltd, a non resident (Listed shares in the Dar es Salaam stock Exchange - DSE) whereby the company owns 25% of the controlling shares. these shares were bought at Tshs 21,400,000 and sold for Tshs 34,300,000

ii.         . Received bank interest in relation to a fixed deposited with YXZ Bank Ltd of Tshs 10,300,000

iii.       Received Tshs 10,000,000 for sale of a land situated at Dar es Salaam. This land was acquired in 2005 for Tshs 1,200,000. The corporation used for agricultural purposes from 20007 – 2008

iv.       . Received divided of Tshs 7,000,000 from HK Ltd. This was a resident corporation where the company owned 28% of the company.

v.         Paid dividends to WISE Ltd of Tshs 23,000,000. This is Non-resident Corporation owning 35% of the shares of the company.

vi.        Received rent (in conducting business) of Tshs. 20,000,0000. This came from an investment building located at Igunga, Tabora. This building was constructed at Tshs 450,000,000. during a years, the company acquired furniture and fixtures for the building worth Tshs 23,000,000. Apart from that, the company incurred Tshs 3,000,000 to repair the building in order to increase its life span.

vii.      Sold 10,000 shares of MAJURA Ltd, a resident corporation (unlisted in the DSE). These were acquired at Tshs 300 each and sold for Tshs 5000 each.

viii.   Received dividends of Tshs 32,000,000 from ABC Ltd, a non resident corporation where SETC LTD owns 40% of the shares of this company.

ix.        Sold a residential house of the company which has been occupied for three years for Tshs 25,000,000. The house was bought in Igunga for Tshs 7,000,000.

x.         Dividends amounting to Tshs 5,000,000 were received from CHEMA Ltd , a non resident corporation which is listed in OSE and 20% of its shares is owned by KET Ltd, a resident company.

The following additional information is also provided (extracted from Paragraph 4 of first Schedule of the Income Tax Act, 2004).

Income Tax to be withheld from payments under Division II of Part VII shall be at the following rates

(a) Payment to which section 81 applies:

i.                    In the case of resident withholder_ at the rates prescribed in regulations; or

ii.                   In the case of a non_ resident withholdee_ l5percent;

(b) Payment to which section 82 applies

i.                    In the case of dividends

(aa) Of a corporation listed on the Dar es Salaam Stock Exchange — 5 percent; or

(bb) of other corporation — 10 percent

(ii). in the case of interest, rent or a commuted pension paid to a resident withholdeee or interest paid to a non resident withholdee — 10 percentage.

(iii)  In the case of other payment - 15 percent;

(c) Payment of which section 83 applies:

i)  In the case of service of fees referred to in section 83 (1) (a) - 5 percent:

ii)  in the case of service fees refereed to n section 83 (1) (a) - 15 percent:and

iii) In the case of insurance premiums referred to in section 83 (1) (b) - 5 percent:

REQUIRED

With respect to SETC (T) Ltd, calculate the following for the year if income ended December 31, 2010

(i)                 Total income and chargeable income

(ii)               Total tax liability and net tax liability

Question Four

Mr Kapinga is a resident employee in COVENANT financial consultants. His total gain from employment during the FY 2005 were Tshs 25,000,000

On 10 February 2005 he received Tshs 850,000 from his Savings account held with Akiba Commercial Bank.

He owns a residential house, which she rents to Germany Embassy whereby she received USD 3000 edery month at ER of Tshs 1275/USD as rent He owns another residential house situated at Kinondoni which she rented to Zambian Embassy and he receives a total rent of Tshs 380,000 per annum, I3othe Rent were paid on 28th February, 2005.

He owns 200 shares in TWIGA CEMENT listed on DSE on 1st March 2005 he received Tshs 1,655,000 as Dividend.

Due to unexpected tragedies Mr. Kapinga decided to take a life insurance policy with ALLIANCE insurance. On March 2005 his policy matured and receive Tshs 800,000

On 15 April 2005 he decided to sell his residential house, which he has been occupying for the past 5 years. The cost of construction this house was Tshs 50,000,000 and she sold to MR. Mkoko for Tshs 63,000,000.

In their office MR. Kapinga, contributed to unproved Pension Fund, and he has been a member since he joined COVENANT. During 2005, the fund decided to distribute the gains from the Fund, and Mr. Kapinga received Tshs 500,000

He also owns another private residential house in Dodoma, which was constructed in 1990. But he does not occupy this house he rented it to NMB where he receives rent of Shs 1,000,000 per years. He constructed the house for Tshs 30,000,000 and he paid Tshs 250,000 to CHIKO advocates as transfer fee of the land during purchase. Later on July 2005

In his Farmland situated in Madale Dar es Salaam, there were discovered some RUBY stones on 1st September 2005 Mbezi investment entered into agreement with him to extract the stones and paid him Tshs 8,500000 as a payment for the right to extract the ruby stones.

He has interest in KAT a resident trust, On 15 October 2005 the received Tshs 900,000 as distribution from the trust.

During the year he sold 10 hectors land which was at MBEZI BEACH and received Tshs 25,000,000. He purchased this land for Tshs 15,000,000 in 2000. Mzee Abdaflah who has been using this land for agricultural purposes for two years before the decided to sefl it to Mr. Kapinga.

During the year MR. Kapinga, divorced his wife, by Court order he was instructed to transfer some of investments to his wire. He decided to transfer the followings.

(i)                 The 1000 shares in TOL, these shares had Par Value of Tshs 200 per share at the time of acquisition. They incurred Tshs 200,000 as brokerage costs. The same shares now have a market value of Tshs 150 per share.

Required

By applying relevant provisions of ITA 2004, compute for MR. Kapinga foor FY

2005

1.       Income from investment

2. Total income FY 2005

Note: Assume during the year Employer contributed on behalf of MR. Kapinga Tshs 1,800,000 to NSSF which was not included in computation of employment income and himself contributed Tshs 900,000 for the whole year of 2005.

Question Five

PP limited runs a tourist resort Mikumi Tanzania. It is a resident corporation by virtue of S. 66 of ITA 2004.

1)     DIVIDENDES

-         Received dividend, from TTT limited, a resident corporation, amounting to Tshs 5,500,000.

-         Where PPP Limited owns 45% of the shares of TT Limited

-          Received Dividend amounting to Tshs 3,000,000 from Tanzania breweries a company listed on the Dar es Salaam stock exchange.

-         Dividends amounting to Tshs 2,500,000 received from HP Williamson

Limited, which is listed on DSE, and is owned 20% by TIKA Limited a non resident company.

-         Dividends amounting to Tshs 1,550,000 received from Chuwa Company limited.

-         Received divided from DONKOR limited a non resident entity, amounting to Tshs 2, 300, 000 where PPP Ltd owns 40% shares in DONKOR LTD.

RENT

PPP limited owns CHUWA TOWER an 8 - story building, which situated along

Zanaki Street. The whole building is rented to various tenants as offices, salon

and shop outlets. PPP limited received in Total Tshs 10,000,000 as rent from all the tenants in Chuwa tower.

PPP Limited has its office along Au Hassani Mwinyi Road, the office was underutilized, PPP decided to rent from part of its office to Juma Bakari a shop businessman, who used it as a shop Mr. Juma pays Tshs 800,000 to PPP limited as rent.

During the year the company received Tshs 300,000 as rent from MR. Chagula a Tanzanian with respect of house occupied by Mr. Chagula situated at Mabibo - Dar es salaam.

PPP Limited received a royalty from Mazimbu Limited amounting to Tshs 4, 5000,000 resulting from, lease OF NATIONAL PARKS videotapes, which MAZIMBU were using for business promotions. on 31st may 200x, PPP Ltd received another Royalty amounting to Tshs 1,000,000 from Jessy limited who bought the right to extract JEMSTONES form one of PP”s mining plots.

During the Yea PPP LTD sold 5 hectors lands, which was at Mikocheni and received Tshs 20,000.000. This land was purchased by PPP Limited for Tshs 3,000,000 in 1980. 3 Years prior to its sale this land has been used as agricuftural land.

PPP Ltd had 8 hectors land at Bunju, which was purchased for Tshs 1,000,000 in 1995. on 2nd February 200x, PPP Ltd decided to sell the land for Tshs 5,4000,000. Through the period the land has been used for agriculture. The market value of the land at the time of sale was Tshs 5M.

Both PP Limited JEKA Limited were planning to acquired some shares in a newly formed company CHEKA Limited. Due to scarcity in the number of shares available in CHEKA Ltd, JEKA decided to pay PPP Ltd Tshs 1,050,000 so as to restrict him from buying the shares in CHEKA LTD.

On 1st June 200x PPP Limited received Tshs 1,200,000 as interest from Tanzania Postal Bank with respect to deposits made in TPB.

On 6th June 200x PPP Ltd received Tshs 2,800,000 as a distribution form TOTO resident trust.

During the year PPP Ltd paid life insurance worth Tshs 800,000 for two of his prominent employees.

One of the building owned by PPP situated in Mwanza which has been rented as offices was caught in fire, and it was totally destroyed by fire. This building was contracted for Tshs 400,000,000 in 2002, the from part of the building was altered in order to make the building much more modern for Tshs 50,000,000. NIKO Advocates were paid Tshs 10,000,000 as legal fees for preparation of all documents related to ownership of the land. since the building was completely destroyed.

National insurance corporation, the insurer of PPP Ltd decided to take the destroyer building and replaced it with building costing Tshs 465,000,000.

During the Year PPP Limited decided to transfer for free 1000 shares owned in TCC to his sister company DDD limited. These shares were acquired at DSE at Tshs 500 per share. At the time of acquisition of these shares Tshs 150000 to DSE broker. The market of each share at the time of transfer was Tshs 510.

Required: By applying relevant provisions of ITA 2004, compute

(a)  Investment income and

(b)  Total income of PPP Limited for FY 200x