Trade & Investment Income
A Lesson Context
Individuals in Zimbabwe often earn income from sources other than a salary. This creates two main buckets:
- Trade Income: Active income from running a business or profession (Sole Trader, Consultant, Hawker).
- Investment Income: Passive income from assets you own (Rent, Interest, Dividends).
While both are technically "Gross Income", they often trigger different tax mechanisms (like Withholding Tax).
B Legislative Framework
Section 2 (Definition of Trade): Includes any "profession, trade, business, employment, calling, occupation or venture...".
Section 8(1) (Gross Income): Specifically includes annuities, premiums for use of property (leases), and amounts received for services.
C Trade Income (Active)
If you are self-employed or run a "side hustle", you are carrying on a trade. You must prepare accounts (Income vs Expenses) to determine your Taxable Income.
Computation Logic
Less: Cost of Sales
Less: Allowable Deductions (Rent, Wages, Electricity)
= Taxable Profit
This profit is then added to your other income (though usually taxed at a flat rate if essentially a corporate structure, or added to employment income for individuals depending on the setup - Note: Sole traders are often taxed using the AIDS Levy tables or Corporate Rate depending on formalization. ZIMRA increasingly pushes for Quarter Payment Dates (QPDs) for traders).
D Investment Income (Passive)
1. Rental Income
Fully taxable. However, you can deduct expenses incurred to produce it:
- Rates and Water (paid by landlord).
- Insurance of the property.
- Repairs and Maintenance.
- Mortgage Interest.
2. Interest Income
- Bank Interest (Local): Financial institutions deduct Withholding Tax at source. For individuals, this is effectively a Final Tax (you don't declare it again).
- Foreign Interest: Fully taxable at 20% flat rate (usually).
3. Dividends
- Local Companies: Exempt from Income Tax in your hands (S16(1)(h) equivalent/3rd Schedule). The company already paid Corporate Tax, and you suffer Withholding Tax (Non-Resident/Resident Shareholders Tax).
- Foreign Dividends: Taxable in Zimbabwe at a flat rate of 20%.
E Case Law Integration
Scenario: A taxpayer won money betting on horses. Trade or Luck?
Ruling: Generally, gambling is not a trade. However, if it is done systematically and organized as a business (professional gambler), it becomes a Trade, and the winnings are taxable.
Dealt with pre-incorporation expenses. Generally, you cannot deduct expenses incurred before you started trading.
F Common Pitfalls
The "Passive" Mistake
Assuming that because you have a job, your side business selling clothes
is "just a hobby" and not taxable.
Truth: If there
is a "scheme of profit-making", it is a Trade. You must register for
QPDs or presumptive tax.
Foreign Dividends
Assuming foreign dividends are exempt like local ones. They are not. They are taxable at 20%.
G Knowledge Check
Q1: Mr. T receives $1,000 dividend from Econet (ZSE Listed). Is this taxable income?
Q2: Ms. S receives $500 dividend from Apple Inc (USA). Is this taxable?
Q3: A landlord pays for the electricity of his tenant. Can he deduct this expense?
Attempt these before checking the answers below.
H Quiz Answers & Explanations
A1: No (Exempt). Dividends from resident companies are exempt from income tax (subject to Wht Tax at source).
A2: Yes (20%). Foreign dividends are taxable at a special flat rate.
A3: Yes. If the landlord is contractually obliged to pay it, it is a valid expense in the production of rental income.
I Key Takeaways
- Trade is Broad: Almost any profit-making venture is a trade.
- Rent Is Taxable: But you can claim repairs, rates, and interest.
- Dividends: Local = Exempt. Foreign = Taxable (20%).
- Withholding Tax: Often a final tax for investment income like local interest.