INVESTMENT INCOME (S.9 of ITA 2004): TANZANIA TAX LAW
Determination of INVESTMENT
Introduction
— Investment
income arises from the conducting of an investment in any year of income.
— The
conducting of an investment involves the owning of assets other than the owning
of such assets for personal use by the owner.
— Main
distinguishing feature between investment income and business income is that
investment income involves the holding of an asset by its owner and the return
due to the owner of the asset is a payment by the user for the use of such an
asset.
— Investment
income arises from the conducting of an investment in any year of income.
— The
conducting of an investment involves the owning of assets other than the owning
of such assets for personal use by the owner.
Circumstances:
Where a
person’s activities consist mainly in the making and holding of investments,
whether in land and buildings, for the purpose of receiving rents or in
securities for the purpose of receiving interest or dividend and the principal
part of his business is derived there from.
For example,
interest received by the banker would be a business income because banker’s
main activity is to provide money for the use by others.
On the other
hand, interest received by a customer from a deposit account with a banker is
investment income.
Sources of
investment income ( S.9 (2))
a) Dividends (S.54)
— It
is a distribution of the profits of a company whether profits have been
capitalized or not.
— Dividend
is defined as a distribution by the entity to the extent that it is not a
repayment of capital (S.3 of ITA 2004 ).
b) Interest
Interest
for the use of money and includes;
— Any
interest on debt obligation
— Gains
by way of discounts or premiums
— Payments
under finance lease
— Amount
treated as interest under S.32
c) Rent
·
Include all income received for the use/ lease
of a tangible asset.
·
Rent received by the resident individual
landlord on residential premises leased by the individual tenant is exempt if:
·
Such individual does not conduct the business of renting of properties
·
Does not exceed 500 000 p.a (S. 86(4 a-c).
d) Royalty
·
Payment made for the use of intangible asset
such as copyright, patents, trade mark, secret formulae or processes and know-
how.
·
Also, royalty includes those case where a
payment is made:
·
To refrain the owner from using such intangible
assets
·
For the use of industrial, commercial or
scientific equipment
·
A royalty by definition however does not include
a natural resource payment
·
Note:
further that while income received for the use of patent rights, copyrights etc
is investment income, the income received from the realization of the relevant intangible asset would not be
taxable since the same are neither business nor investment assets.
e) Gains from the realization of Investment
Assets
— Realization
that gives rise to an investment income must be realization of investment asset
and not business assets or depreciable assets or trading stocks.
— Investment
assets are:
— Shares,
other than shares (S.3)
a.
By resident parent in its resident subsidiary; or
b.
Listed in the Dar es salam Stock Exchange; or
c.
By a nonresident person controlling less than 25% of
the controlling shares of the company
NB: All shares covered by (this) exception
are neither business nor investment assets.
A beneficial interest in a non resident trust
Interest in land and buildings
other than: (S. 3)
A private residence in use for
three years or more other than a house with value of TZS 15 million when
realized
NB:
This however may be a business asset if owned by a person whose business
involves the leasing of private residence
An individual’s land that has
been used for agricultural purposes for the past two years and whose market
value does not exceed TZS 10 million at
the time of realization
NB: This is neither
a business asset nor an investment asset.
— Taxable investment income is the gain equals to the difference between the market value of the investment asset
and its cost.
f)
Distribution of a trust (S.52)
A trust is a confidence reposed either expressly or
impliedly in a person (called the trustee) for the benefit of another person
(beneficiary)
It is an arrangement whereby a person (settler) transfers
certain properties to another person (trustee) on trust for the benefit of some
other person or persons (beneficiary/ beneficiaries)
— A
trust is liable to income tax as a trust person
— Any
distribution (by a non resident trust
only) to beneficiary is taxable
as investment income.
— Any
distribution by a resident trust is exempt under S. 52 (1).
g) Life insurance Gains (S.60)
Life assurances are concerned
with the life of the person at his death of for a specified term. Taxable gain
equals to the difference between the premiums paid and the proceeds received
from the insurer.
Such gain is only taxable where
the proceeds are paid by non - resident insurer.
Act does not tax gains from such
policies which are for the term of less than five years or in respect of which the insurer can
terminate before the expiry of five years.
h) Natural resource Income
•
Includes any income for granting the right to
take natural resources from land or sea.
i) Income from an Unapproved Retirement Fund (
S.61 & 62-3)
— Such
income is only taxable if paid by an Unapproved non resident fund.
— The
taxable gain equals to the excess of the benefits received over
the premiums paid to the fund.
j) Investment Restrictive covenants
Any amounts received in
consideration of accepting a restriction on conducting an investment forms part
of investment income of the person accepting the restriction.
ALLOWABLE DEDUCTIONS (EXPENSES
DEDUCTIBLE)
— Expenses
that may qualify under the “wholly and exclusively” test would include, repairs
and maintenance, interest and other revenue expenses such as salaries and
wages, utility etc.
— S.
19 allows the deductions of a loss in one investment against the income of
another investment.
EXCLUDED AMOUNTS (S.9 (3))
— In
calculating a person's gains and profits from conducting an investment, the
following amounts shall be excluded;
a)
exempt amounts and final withholding payments; and
b)
amounts that are included in calculating the person's
income from any employment or business.
WITHHOLDING TAX SYSTEM
(DEDUCTION AT SOURCE)
Concept and operation of the
system
— Withholding
tax system is a tax collection method whereby the tax is collected at the
source of payment and remitted to the tax authorities within 7 days after month of deduction. The
recipient gets the net income only.
— Failure
to deduct or remit the tax on the statutory due dates attracts penalty and the
tax may be recovered from the defaulter.
SINGLE INSTALLMENT TAX (S.90)
— Realization of interest ( in land and its
buildings, if any) will be taxed as ‘single installment tax’Please read also
S.90 (3-8)
INVESTMENT INCOME ILLUSTARTION 1.
During the year 2011, KUJIAJILI
Company Ltd. conducted the following transactions:-
(i)
Received dividend, from ABC Ltd., a resident
corporation, Tshs. 11,000,000. KUJIAJILI Ltd. owns 40% of the shares of the ABC
Ltd.
(ii)
Dividends amounting to Tshs. 5,000,000 were received from Beta Ltd., which is listed on
the DSE, and is owned 20% by ADB Ltd. a non resident corporation
(iii)
Dividend amounting to Tshs. 10,550,000 received from
Malaika Company Ltd., a resident corporation.
(iv)
The office of KUJIAJILI Company limited is
underutilized. The company decided to rent the front part of its office to
Mabele Joseph a shop businessman, who used it as a shop. Mr. Mabele Joseph paid
Tshs. 2,800,000 as rent.
(v)
During the year the company received Tshs. 30,000,000
as rent from Mr. Masanja Ahmed, a Tanzanian with respect of a house occupied by
him.
(vi)
Also the company received a royalty from TMC Ltd.
amounting to Tshs. 24,500,000 out of lease of videotapes used for promotion.
(vii)
During the year, KUJIAJILI Ltd. sold 5 hectares of
land, which was at Temeke and received Tshs. 550,000,000. This land was
purchased for Tshs. 350,000,000 in 2005. Three (3) years prior to its sale,
this land had been used as agricultural land.
Required:
By applying the relevant
provisions of the ITA 2004, compute investment income for the KUJIAJILI Company
for the year 2011.
ANSWER TO INVESTMENT INCOME ILLUSTARTION 1.
Solution
Determination of taxable
investment income of KUJIAJILI ltd for the year 2011
|
|
Amount in Tshs
|
|
i.
Dividend from ABC Ltd (Subsidiary S.54(2)- exempt
|
NIL
|
|
ii.
Dividend from ADB (Listed at DSE) S.3 and Para 4 of 1st
Schedule.
|
NIL
|
|
iii.
Dividend from Malaika
|
10,550,000
|
|
iv.
Rent from Mabele Joseph (Part of office building)
|
2,800,000
|
|
v.
Rent from residential house, occupied by Masanja (S.86(4)
|
30,000,000
|
|
vi.
Royalty from TMC Ltd -Videotapes
|
24,500,000
|
|
vii.
Gain from proceeds of sale of land (s.90)
|
200,000,000
|
|
Total taxable investment income
|
267,850,000
|
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