The tax law requires records to be kept for 6 years. This is simple for income tax purposes because income tax returns have to be filed each year. Besides this, the records are dealt within a business set up. Under the Capital Gains Tax Act, record keeping is more problematic due to the fact that the disposals are infrequent and also because there could be a significant delay between the date the expenditure was incurred and the date of sale of the property. Another problem is that proprieties may also be held by individuals who hardly maintain records of their expenditure. It is rare for individuals to keep records of costs on labour, materials, amounts paid to contractors, any architect’s fees, building permit charges and legal fees directly connected with building their homes. The downside is that Capital Gains Tax will be levied on gross capital amount, against the spirit of the law which provides that capital gains tax should be levied on the net wealth i.e. proceeds less costs.
In Zimbabwe, Capital Gains Tax is levied on specified assets, namely immovable properties which include homes, marketable securities and certain intangible assets. The tax is levied on capital gain which is the amount by which a specified asset’s selling price exceeds its base cost (cost of acquisition/construction, improvement, inflation allowance, selling costs etc). Capital Gains Tax is then charged at the rate of 20% of the capital gain for a specified asset acquired after the 1st of February 2009 and at 5% of proceeds if the specified asset was acquired prior to 1 February 2009. Marketable securities listed on Zimbabwe Stock Exchange stock are exempt from Capital Gains Tax, but are subject 1% Withholding Tax.
Deductible expenditure includes the cost of acquiring or constructing the specified asset. If you acquired the asset by way of inheritance your expenditure is amount declared for estate duty purposes of the deceased and in the case of a donation your acquisition cost is the amount used for Capital Gains Tax or Income Tax purposes of the donor. Expenditure on improvement, additions or alterations to the specified asset is also deductible, but does not include expenses deductible for Income Tax purposes such as repairs. Inflation allowance is 2.5% of acquisition or construction cost and cost of improvements, alterations or additions. It is granted per year or part of the year thereof from the date of incurring the expenditure until the date of selling the specified asset. Other expenditure that is deductible is that which is directly incurred or in connection with the sale of the asset.
Only provable expenditure is deducted, implying records should be kept of specified asset’s purchase price or construction cost, cost of improvements, additions, and other items that affect the basis of your specified asset. The records are required to prove or justify costs to ZIMRA. The exact information required depends on the type of asset sold, when it was acquired, how it was acquired, whether a valuation was used and how it was sold. On acquisition, documents to retain will include acquisition details, legal costs, stamp duty, valuation fees etc. An estate valuation report is required for an asset acquired by way of an inheritance. If expenditure was incurred in improving the property and this is reflected in the value of the asset on sale, then these costs are usually allowed and the invoices should be retained.
A formal valuation from reputable valuation firms (3 quotations) is required whenever a specified asset is sold. The Commissioner General can set aside the selling price if it has not been established at fair market price. The valuation report is required to justify selling price and should be retained. Any sale agreement giving details of the sale proceeds will be required as well. Where an asset is gifted, the sale proceeds may be the market value and evidence of this is a valuation report and this should be kept. Where the asset is destroyed correspondence relating to an insurance claim including details of any compensation received for a damaged asset should be retained.
Without paper work it is difficult to justify costs and you may be assessed on proceeds or a higher gain. The paper work should be written in the name of the owner of the property. The invoices or receipts should specify details of materials acquired (quantity and prices must be contained). Your file must also contain delivery notes. Quotations are not acceptable to ZIMRA. Where the materials have been bought unfortunately in the name of the contractor or third parties you may need an affidavit to confirm this. Also keep a contract between yourself and the builder or contractor to justify labour cost. The contract must be signed by both parties. Cash purchases tend to be the major area where audit trail often lacks. It is encouraged to transact through a bank account especially for large transactions. Where this is not possible insist on receiving receipts with full details of your purchases. When you are forced to buy from informal traders still insist on receipts and invoices. If these documents are not available consider making one yourself which the person must sign. Include his name, address and I.D. number in addition to the general contents of an invoice. If records of costs of acquiring/constructing or improving a specified asset are not kept you also stand to lose inflation allowance. For safe keeping of title deeds, receipts/invoices of expenditure and other related correspondences you may consider lodging copy files with your banker or lawyer. This way you may also be able to salvage these files if your original file is lost or was destroyed for instance in a house fire. Meanwhile Matrix Tax School will be hosting its Cross Border Taxes Seminar on the 20th of June 2019. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.