Marvelous Tapera 
Capital allowances are a tax incentive designed to stimulate growth and investment in businesses by allowing the cost of qualifying capital expenditure to be counterbalanced against operating profits, thereby reducing the amount of tax liability.
Capital allowances are obtainable when a business purchases assets i.e., plant and machinery, or constructs, refurbishes or fits out commercial property or industrial building used in an ongoing trade, investment business or for manufacturing purposes.
Expenditure on property and other fixed assets will often symbolise the most significant investment for businesses and it is essential that companies benefit from their full entitlement relief from capital allowances as provided by the Income Tax Act.
Capital expenditure incurred in foreign currency is converted to the ZWL equivalent amount on the date of purchase for both financial reporting purposes and for tax purposes i.e., for the purposes of claiming capital allowances, which will be claimed in the tax computation.
This means that capital allowances are claimed each year based on the ZWL equivalent value determined on the date of acquisition or construction of the fixed assets. In an inflationary environment, claiming capital allowances on a ZWL base cost determined on acquisition results in an insignificant value of capital allowances being claimed. There is little or no relief to the taxpayers as was the intention of the law on claiming of capital allowances.
Rebasing is a concept that provides for the uplifting of capital expenditure to retain value of capital allowances claimed by taxpayers.
Rebasing would benefit those taxpayers who claim capital allowances spread over the useful life of their fixed assets, except for miners who have the option to claim all their capital expenditure in the first year of purchase.
The concept of rebasing was first introduced through Finance Act no. 10 of 2020, which provided for rebasing of assets with outstanding income tax values on December 31, 2020 if such assets were purchased in foreign currency.
The minister of Finance and Economic Development, through Finance no 2 of 2022, reintroduced the same in respect of assets purchased in foreign currency as long as such assets are not fully tax depreciated as at January 1, 2023. Thus, the foreign currency invoice will be converted to ZWL at the interbank exchange rate on January 1, 2023 for the purposes of determining capital allowances.
The Finance Act no. 2 of 2022 provides for rebasing of unredeemed capital expenditure balance established at January 1, this year so as to retain the value for purposes of capital allowances. The provision reads in part as “…If, in relation to capital allowances claimed (in any year of assessment before the year of assessment beginning on the 1st January, 2023) in terms of paragraphs 2, 3 and 4 of the Fourth Schedule to the Taxes Act, any balance of such allowances remains unredeemed as at the 1st January, 2023, any such unredeemed balance shall be rebased to the local currency equivalent of the outstanding foreign currency invoice value using the Reserve Bank auction rate prevailing on the 1st January, 2023”.
This means that the outstanding balance of the foreign currency invoice as at January 1, 2023 is multiplied by the interbank exchange rate on that date to obtain amount ranking for capital allowances. This applies only to unredeemed capital expenditure balance as at January 1, and for capital allowances to be claimed in the 2023 tax year. As the law stands currently, it implies that the rebasing will only be done once and the rebased amount will be claimed from 2023.
Until the promulgation of another rebasing date, capital allowances will be claimed on the amounts rebased on January 1, 2023 until the cost of assets is exhausted in capital allowances. A time interval of two years lapsed from when the law was first introduced in December 2020, to when it was reconsidered in December 2022.
All this while taxpayers have had to claim capital allowances on a ZWL valued eroded by inflation. One would have anticipated the law to have considered the inflationary environment and effect the rebasing to be done each time a taxpayer needs to claim their capital allowances.
In our view,Treasury has picked January 1 for rebasing to enable taxpayers to claim uplifted capital allowances throughout the 2023 tax year as they prepare their quarterly paymrent dates (QPDs). However, by the time the taxpayers get to the end of the year of assessment, at December 31, the uplifted value of capital allowances may have been eroded by inflation if the value of the ZWL continues to decrease at the same rate as it was in the prior year.
To fully cushion taxpayers from the effects of inflation, it may have been necessary to have the effective date of rebasing set on December 31, 2023, this way, it would mean by the time taxpayers prepare their annual tax return, they are claiming a capital allowance based on the exchange rate at December 31, 2023.
The uplifting of capital allowances could alternatively be done by reference to the exchange rate at the time the taxpayers are preparing their QPDs.
This would be in line with the new provision in section 37AA of the Income Tax Act, which requires taxpayers to use the average or spot rate for the purposes of converting their transactions from foreign currency to ZWL or vice versa.
With the introduction of two business partner numbers, one could argue that there is no need for a taxpayer to convert foreign currency invoices on acquisition or construction of fixed asset.
Capital allowances of such invoices can be converted to ZWL amounts as per requirements of section 37AA of the Income Tax Act.
In the presence of section 37AA, the rebasing of capital allowances appears to be parallel guidance, which does not maximise the tax benefit on claiming of capital allowances.
Tapera is the founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School. He writes in his personal capacity.
