Exemptions from Income Tax
A Lesson Context
Under Zimbabwe’s Income Tax Act, certain types of income are explicitly exempt from tax. This generally serves one of three purposes: to support public/charitable institutions, to provide social welfare relief (e.g., to the elderly), or to incentivize specific economic activities (e.g., export or savings).
If an amount is "Exempt", it is excluded from the calculation of Taxable Income entirely.
B Legislative Framework
Section 14 of the Income Tax Act states that the amounts listed in the Third Schedule shall be exempt from income tax.
The Third Schedule is an extensive list of specific exemptions. If an income source falls within this schedule, it is tax-free. Generally, expenses incurred to earn exempt income are not deductible (Section 16(1)(f)).
C Public & Non-Profit Exemptions
1. Government & Parastatals
The receipts of the following are exempt:
- Local Authorities: Income of municipalities and rural district councils.
- Statutory Bodies: The Reserve Bank of Zimbabwe, ZIMRA, POSB, and other designated funds.
- Foreign Government Agencies: Approved agencies (e.g., USAID, UN Agencies) operating in Zimbabwe.
Note: This exemption covers the entity's income, not the salaries of its employees.
2. Non-Profit Organizations
Receipts of charitable, religious, and educational institutions of a public character are exempt. This includes:
- Ecclesiastical Institutions: Churches and religious orders.
- Charitable Trusts: Trusts of a "public character" (serving the public, not private individuals).
- Clubs & Societies: Sporting/social clubs, provided no profit is distributed to members.
- Trade Unions & Benefit Funds: Income of registered trade unions and medical aid societies.
D Employment & Social Welfare
1. State Officials
The salary and emoluments of the President are exempt. Allowances for MPs, Ministers, and Chiefs (Traditional Leaders) are also often exempt via statutory instrument.
2. Elderly Persons (55 years +)
- Pensions: Any pension received by a person aged 55 or older is exempt.
- Interest: The first US$3,000 (or ZWG equivalent) of interest accruing to a person aged 55+ is exempt.
3. Retrenchment Packages
For involuntary retrenchment (under 55), the greater of US$3,200 or 1/3 of the package (capped at US$15,100) is exempt. This provides a tax-free cushion for job loss.
4. Bonus
The annual bonus (13th cheque) is exempt up to US$700. Any amount above this is taxable.
E Financial & Investment Exemptions
1. Dividends
Dividends from a Zimbabwean company are exempt from Income Tax (though subject to Resident Shareholders Tax withheld at source).
2. Interest
- POSB: Interest on deposits with the People's Own Savings Bank is exempt.
- Tax Reserve Certificates: Interest tailored to pay taxes is exempt.
- Class C Permanent Shares: Interest/dividends from specific building society paid-up shares.
F Miscellaneous Exemptions
- Scholarships: Educational bursaries and scholarships for full-time instruction.
- Alimony: Maintenance payments received under a judicial order or divorce settlement.
- Awards: Amounts for injury, sickness, or disability compensation (e.g., Workers Compensation).
G Case Law Integration
Principle: Incorporation matters. The court held that once a football club incorporated as a company (even if limited by guarantee), it lost the automatic exemption granted to "clubs and associations". To remain exempt, a non-profit must stick to the forms specified in the Act.
Public Character: To be exempt as a charitable trust, the trust must be of a "public character". If the beneficiaries are a private class of persons (e.g., "my descendants"), it is not exempt.
H Knowledge Check
Q1: A 60-year-old retiree receives a monthly pension of $800. Is this taxable?
Q2: A church runs a commercial bookstore for profit. Is the bookstore's income automatically exempt?
Q3: You receive a bonus of US$1,000. How much is taxable?
Attempt these before checking the answers below.
I Quiz Answers & Explanations
A1: No. Pensions received by persons over 55 are exempt.
A2: No. While the church's donations are exempt, trading income (like a bookstore) might be taxable unless structured through a specific licensed company or deemed integral to the charitable purpose.
A3: $300 is taxable. The first $700 is exempt.
J Key Takeaways
- Third Schedule: This is the "Exempt List". If it's not here, assume it's taxable.
- Entity vs Employee: Exempting an organization (like a City Council) does not exempt its employees' salaries.
- Public Character: Charities must serve the public to qualify.
- Social Relief: The Act favors the elderly, disabled, and retrenched workers with specific exemptions.