The Minister of Finance and Economic Development Professor Mthuli Ncube presented the Mid Term Fiscal Policy on the 1st of August 2019. Before the budget, I expected him to address the potential capital gains tax distortions arising from the conversion of United States balances into RTGS$ on a one-to one basis through SI33 and to deal with the form of currency for purposes of remitting taxes to the ZIMRA following the banning of foreign currency through SI142. Of these two issues, the Minister addressed the first issue but distortions still exist. With regard to the payment of taxes in foreign currency, he reinforced that taxes are to be paid in foreign currency on foreign currency transactions. This article seeks to provide a run-down of the changes specific to capital gains tax regime and highlight the remaining sticking issues of the proposed regime.
Paying capital gains tax in foreign currency
The Minister retained the laws on payment of taxes in foreign currency notwithstanding the agenda to promote the Zimbabwe dollar as the sole legal tender in domestic transactions as articulated in SI142. Therefore when a specified asset is sold in foreign currency, capital gains tax is required to be paid in foreign currency. This is mentioned in the Finance Bill which provides that “… it shall not be deemed for the purpose of the Capital Gains Tax Act [Chapter 23:01] that all transactions involving the sale or other disposal of a specified asset are in Zimbabwean currency, rather—….where any such transaction results in a capital gain being received by or accruing to or in favour of a person in whole or in part in a foreign currency, capital gains tax at the rate specified… shall be paid in foreign currency on the capital gain or on such portion of it that is equivalent to the portion of the total transaction denominated in foreign currency”. This is somehow repeated by s37 of the Finance Act which provides “where only part of the capital gains are received by or accrued to or in favour of a person in a foreign currency, the amounts of any tax due on both parts of such capital gains in terms of s38 and 39 shall be calculated separately and paid in the appropriate currency relative to each part”. The separate computation as envisaged by s37 is that in a part foreign currency and part Zimbabwe dollar sale, one could possibly be required to pay capital gains tax in one currency whilst at the same time experiencing capital loss in the other currency, or when the overall position could have been a loss. This presents distortions, subjectivity and administrative complexity in the capital gains tax regime.
The new rates of capital gains tax
As expected the Minister addressed the distortionary effect brought about by SI33 of 2019 which provides among others that for accounting and other purposes assets and liabilities held prior to 22nd of February 2019 and valued and expressed in United States Dollar on 22nd of February 2019 shall be deemed to be values in RTGS dollars at par with United States Dollar. This has the effect of converting cost base of specified assets in United States to a weaker RTGS dollar on 1:1 basis, and thereafter restricted and yet the selling price of those assets could be inflated as it accords with the interbank rate resulting in an artificial capital gain. In order to correct this anomaly, capital gains tax rate was reduced from 20% to 5% of capital gain. Capital gain is an amount resulting from deducting from the sale proceeds, sum of costs as provided for in the Capital Gains Tax Act (i.e. original cost, cost of improvement, 2.5% inflation allowance, selling expenses etc). Therefore, capital gains tax may be levied where there is none in real terms. Taking for example a person who bought a house in 2017 for US$100,000, (i.e. RTGS$100,000 because of SI33) and the property is sold now to a buyer who is willing to pay RTGS$450,000 (i.e. US$90,000 equivalent), capital gains tax will arise under the current tax regime when in real terms there is a capital loss. Meanwhile, the Minister has proposed a 5% of gross proceeds in respect of disposals or sales of specified assets made prior to the 24th of June 2019 where capital gains tax has not yet been assessed and paid.
The rates of capital gains withholding tax
The Minister also revised downwards the rate of capital gains withholding tax on sale of immovable property to 5% from the current 15%. This is a welcome relief in terms of cashflow management to taxpayers. The rate of withholding tax on listed marketable securities is retained at 1% of the price at which the security was sold. It appears the Minister has omitted the capital gains withholding tax rate on the disposal of unlisted marketable securities and this has completely been removed from the Act.
The Finance Bill proposes to exempt from capital gains tax a sale or disposal of any shares or other marketable securities to the Sovereign Wealth Fund established by the Sovereign Wealth Fund of Zimbabwe with effect from the 1st of January 2019. It further reviewed the threshold for assessed capital loss not to be carried forward from ZWL100 to ZWL 800 and exemption of marketable securities from capital gains tax when disposal has been made by a person who is 55 years or above; from ZWL1800 to ZWL14 400. Threshold of capital gains which shall not be subject to tax revised from ZWL50 to ZWL400.
In conclusion, the clean-up exercise was necessary and the Finance Bill attempted to do that, but the impact of SI33 cannot in all cases be eradicated. Cases where capital gains tax would be paid in future as the prices of properties go down will be many.