SECTION 15 of the Income Tax Act [Chapter 23:06] allows for the deduction of certain expenditures in the determination of taxable income for a taxpayer. Section 15(2)(a) is where the general deduction rules are determined and it establishes that expenditures or losses are deductible to the extent to which they are incurred for the purposes of trade and in the production of income and are not capital in nature.
This rule has a number of components:
- Extent to which;
- Expenditure or loss;
- Purposes of trade or in the production of income; and
- Capital in nature.
Further to section 15(2)(a) there are specific provisions from section 15(2)(b) up to section 15(2)(oo) that give guidance on the deductibility of specific expenditures or losses.
Section 16 of the same Taxes Act, (on the other hand) prohibits some of these expenditures, which would ordinarily have been allowable under section 15(2)(a). This section starts by, “Save as is otherwise expressly provided in this Act, no deduction shall be made in respect of any of the following matters-,”
One of the key prohibitions is found in section 16(1)(f) and it is about the deductibility of expenditures or losses incurred in the production of exempt income. This means that expenditure is incurred to produce exempt income is exempt even though it is for the purposes of trade. Are capital allowances for an asset that is being used to produce exempt income deductible? My views on this matter are as follows:
Section 16(1) is designedly applied to section 15(2)(a) expenditures only and not to other section 15(2) provisions.
Section 15(2)(c) excludes the connection to production of income.
Section 16(1) commences by, “Save as is otherwise expressly provided expressed in this Act…” and this can be interpreted to mean that the provisions in that section do not apply where there are express provisions elsewhere. Section 15(2)(c) expressly provides for the treatment of capital allowances and therefore s16(1)(f) should not be applied.
Furthermore, section 15(2)(c) does not link the deductibility of the allowances to production of income (which, by the way, would ordinarily have been capital in nature under section 15(2)(a) had it not been of this specific guidance in section 15(2)(c)).
It is my view therefore, that capital allowances from a qualifying asset that is used to produce exempt income are deductible as per section 15(2)(c) of the Taxes Act as-read-with the 4th schedule. Where the exempt income has a limit and the rest of the same income is not exempt, can the associate expenses be apportioned to determine the prohibited amount?
In some cases, exemptions are limited to an amount, for an example rental income to a person above 55 years are exempt up to ZW$120 000 (at the time of writing).
Where the taxpayer receives the rentals that are below the threshold, the entire amount is exempt and the attend expenditures are prohibited.
Where, however, the amounts received exceed the threshold then a portion of the income is exempt and the remaining portion is taxable.
Section 16(1)(f) says “so much of any expenditure or loss” and therefore suggests apportionment, while s15(2)(a) also states that deductibility is to the extent to which ….”
These aspects of the two provisions are in support of the apportionment of the prohibited deductions based on the extent to which the income is exempt.
It is my view, therefore, that the expenditure or loss associated with partially exempt income must be apportioned between prohibited deductions and deductible expenditure.
- Mapetere is the head of CAA Business School. The information provided in this paper does not, and is not intended to, constitute legal advice; instead, all information, content and materials available in this paper are for general informational purposes only. — email@example.com, www.cbs.ac.zw or 0717 144 840.