After the introduction of what is now commonly referred to as the 2% tax, many in Zimbabwe do not want to hear about another tax, ever. If it’s any comfort the capital gains tax existed well before the 2% tax and is quite a different tax. Let’s explore it a little bit.
Capital Gains Tax Act
Whereas the Income Tax Act puts forward the treatment of amounts derived from normal earned income, the Capital gains tax serves the purpose determining the treatment of increases realised from the appreciation in value of capital items. If one buys property and holds onto it for 10 years then sells it for a higher price later, they realise a gain from the increased value. With that in mind let’s take a look at the practical aspects of Capital Gains Tax.
Capital Gains Tax is a tax levied for the appreciation in value realised by the seller of a specified asset. Specified assets fall into two major categories:
- Immovable property including building, dam, land, road, mineral rights excluding a mining claim purchased for resale (these fall under income tax).
- Marketable securities including shares, stock, debenture, unit trust, intellectual property rights such as patents, trademarks, industrial designs, mining rights and copyright.
Capital gains tax is levied on the seller of the specified asset. As mentioned earlier the seller of the specified asset realises the gain in the disposal (sale) of the asset.
How Capital Gains Tax (CGT) is calculated
Date of purchase before 1 February 2009, Capital gains tax is 5% of amount realised from sale. E.g if I bought a house in Mufakose in 2007 for a few million Zim dollars, and then sold it in 2018 for $40 000, I should pay $2000 (5% * $40 000) capital gains tax.
If date of purchase is after 1 February 2009 (When Zimbabwe dollarised) then move to step 2
Calculate cost of improvements
If any improvements have been made to the property, such as new construction these shall be added to the cost of the property
Calculate inflation allowance
2.5% x cost x number of years held
It is important to note that part years count as full years. An asset held for 2 and a quarter year is deemed as having been held for 3. The inflation allowance is applied to each line item separately.
Add together incidental selling costs such as legal or conveyancing fees where applicable.
Calculate capital gain
Capital Gain = Selling price – Cost (plus inflation allowance)- Improvements (plus inflation allowance)- incidental selling costs
Capital Gains Tax due = Capital Gain x 20%
Assume property acquired in October 2013 for $95 000 was sold in July 2018 for $135 000. There we no improvements done on the property.
Capital proceeds/Selling Price = $135 000
Cost of acquisition/Buying Price = $95 000
Inflation allowance ($95 000 x 2.5% x 5 years) = $11 875
Capital Gain = $135 000 – $95 000 – $11875 = $28 125
Capital gains tax = $28 125 x 20% = $5 625
There are transfers which are exempt from Capital Gains Tax
• Transfers of any specified assets between spouses.
• Transfer of principal private residence between former spouses in pursuit of a divorce order.
• Transfer/disposal of a specified asset by a deceased estate
• Transfer of a principal private residence by an individual who is of or above the age of 55 as at date of sale/transfer.
• Where one uses the proceeds of the sale of the sold home to buy a new home by the end of the year following the sale. The person must inform the tax authorities when submitting the return.
• Where the seller is 55 or older, the first $1800 of sale proceeds is CGT exempt.
• Where an individual transfers business property to a company that they own
• Donation of housing units to a local authority, approved employee share ownership trust or community share ownership trust or scheme.
While ZIMRA generally accepts the selling prices given, some cases may warrant the use of a deemed value. This usually happens when the selling price reported is considered to be markedly different from market values with the purpose of concealing income to evade tax. Lowering the selling price to reduce the capital gain and hence the Capital gains tax. Such cases include:
• Sale/transfer of property between related parties where the relationship affects the agreed price of the property.
• Deliberately under-declaring value of a property in order to evade payment of full Capital Gains Tax.
• Sale of a property in settlement of a debt by private treaty where the seller may deliberately under-declare the value of the property to “free” funds to cover a debt.
In such instances section 14 of the Capital Gains Tax act allows the tax commissioner to increase the value or call for a valuation to determine a deemed value for capital proceeds.
How to apply for Capital Gains Tax Clearance Certificate
Both the buyer and seller, or their authorized representatives will be required for separate interviews with ZIMRA as part of the process towards assessment of the Capital Gains Tax due or conclusion of the transaction whether or not Capital Gains Tax is payable.
To apply for capital gains tax clearance, the following is required;
• Fully completed Capital Gains Tax form (CGT1)
• Completed ZIMRA registration form (REV1)
• Agreement of sale (copy & original)
• Deed of transfer/share certificate (copy & original)
• Copy of proof of payment
• National identification for the seller and the buyer (copy & original)
• Copies of two different utility bills if seller is claiming rollover/exemption
• Power of attorney sealed by notary public if the buyer/seller is out of the country and is being represented (copy & original)
Payment of Capital Gains Tax
On Immovable assets the Capital gains tax or exemption must be applied for prior to the disposal, as capital gains tax clearance is required to finalise the agreement of sale. The capital gains tax must be remitted to ZIMRA within 3 working days of the transfer. This is remitted by the depository or representative of the seller, whichever is applicable.
A Capital Gains Tax clearance certificate will be issued once any amounts due have been paid and the transaction has been finalized by ZIMRA. This clearance certificate will be used to facilitate the transfer of the property to the new owner.
I hope we’ve provided you with a better understanding of Capital gains Tax. If you have any comments or questions, feel free to use the comments section, or check out the ZIMRA website for more information.
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