Interpretations & Announcements
Tax Matrix Analysis of existing and /or new law
Taxation of contract/casual workers
Some companies in Zimbabwe have reduced the rate of employing people on a permanent basis opting to employ on contract basis. This is because of the nature of some businesses, the certainty of going concern and at times the availability of constant income. This means that a person works for a certain period of time for example one week or a year and their contract is renewed after that or terminated. This also applies to non- governmental organisations that do projects with a specific time period and after that embark on another. At times they employ the sufficient human resource for that period and after that start all over. Other organisations that do part time jobs do the same as well. Income for the services rendered is derived from the place services are performed regardless of where the contract is made, the place of payment or the residence of the payer. Where the services are rendered is the source which should be in Zimbabwe as the “source based system is used in this country”. The question that some employers ask is “Is PAYE submitted for such workers who are not permanent “or “Am l supposed to submit PAYE for a one month casual worker”. One can just take for granted that a short period of employment has no need for tax compliance but however that is not the case. The law addresses the issue otherwise.
The Law and interpretation
Employees’ tax is computed on remuneration paid or payable in any year of assessment to an individual who is an employee in Zimbabwe. Whether it’s a written contract or a word of mouth what is important is there being an employer, employee and remuneration for tax to be charged. An employee is a person who performs services for an entity under the direction and control of that entity. The relationship of employee/employer exists when the person for whom services are performed controls remuneration and terms of employment. An employee may perform services on a temporary or less than full-time basis. The law does not exclude services from employment that are commonly referred to as day labour ,part-time help, short term fixed contract, casual labour ,temporary help or probationary.
Paragraph 1(1) of the 13th Schedule of the Act sets the environment for application of employees’ tax. It is clear that the definition of who is an “employee” for the purposes of the tax is not as broad as that of the Labour Act. The said paragraph 1(1) narrows the definition of an employee as follows:
“an individual to whom remuneration is paid or payable at an annual rate that is more than the amount specified in subparagraph (i) of paragraph (a) of sub section (2) of section 14 of the Finance Act [Chapter 23:04] in respect of the year of assessment concerned”.
The remuneration referred to in the Finance Act is US$3,600 per annum and this means that any person who does not earn US$3,600 is not an employee for the purpose of the Act. This means that as long as a person is earning $300 and above, regardless of the nature of employment such as part-time or contract PAYE has to be deducted.
Services rendered at source
As long as a person renders a service that is part of gross income therefore will be subject to tax as long as it is within the stipulated threshold of $3,600.Income from services rendered is derived from the place the services are performed regardless of where the contract is made or residence of the payer. The definition of gross income AS SATED IN Section 8(1)(b) of the Act also includes:
“any amount so received or accrued in respect of services rendered or to be rendered, whether due and payable under any contract of employment or service or not, and any amount so received or accrued by reason of the cessation of the employment or service of a person other than a benefit (not being a pension or gratuity) received or accrued by reason of contributions made to the Consolidated Revenue Fund, and any amount so received or accrued in commutation of amounts due under a contract of employment or service”.
The service should be rendered in Zimbabwe for it to be taxed in Zimbabwe which is supported by the case of COT v Shein 1958(3) SA 14 (FC), the taxpayer was employed to manage, on a salaried basis, a store in Bechuanaland. He sub-contracted, at own expense, a storekeeper to run the store on a day to day basis, while he lived in Bulawayo. He was personally to discharge the other duties as required by the contract. He spent the first four days of each month at the store and about ½ a day whilst in Bulawayo on store business. The Commissioner wanted to tax the ½ day’s remuneration but this was regarded as irrelevant as the taxpayer‘s source of income was mainly in Bechuanaland where he was employed and the greater part of his work was carried out there. An employee’s principal place of work is usually the place where he spends most of his/her working time.
What is the impact of the decision on your business or practice?
- The employer is responsible for deducting and remitting PAYE to ZIMRA for all the employees who earn $300 and above every month regardless of the period worked. Failure to do so the employer will be guilty of an offence and liable to a fine not exceeding $400 or to imprisonment for a period not exceeding six months or to both such fine and such imprisonment.
- It is also the duty of the employer to inform his/her workers about PAYE deduction so that those who do not have the adequate knowledge can enlightened and understand why their remuneration will be lesser than the gross income.
- The employer should be able to differentiate between a contract worker and an independent contractor so as to deduct the correct amounts. In some instances a casual worker may supply their own tools but as long as the hirer provides the substantial investment in or assumes the substantial risk of undertaking he/she still remains an employee subject to payee. In the case that the employer fails to distinguish the employee relationship he/she can consult legal advisors and Tax Matrix can help you with that.
- The source of the services rendered determines whether employee tax should be deducted or not. Hence if the source is in Zimbabwe i.e. where the services are carried out, PAYE should be deducted but if the service is rendered outside Zimbabwe that does not apply. This also applies to employees who work in Zimbabwe but are paid from abroad for example working for international firms or are donor funded; PAYE will be deducted from their incomes in Zimbabwe.