Accounting for Rental Income Tax
In Zimbabwean context, rental income falls entirely and forms gross income of a taxpayer inherently satisfying the provisions set out by Section 8(1) of the Income Tax Act. It is through this legislative section that forms the basis of the taxation of rental income, subjecting it to a corporate tax rate of 25% for each year of assessment.
With the notable rise in Zimbabwe of the conversion of residential properties to commercial ones, the Minister has made great strides in tapping into this niche market for revenue purposes. The most outstanding feature was the prohibition of the deductibility of the rental expense incurred by lessees should they not disclose the Ultimate Beneficial Owner (“UBO”) as per Section 16(1)(u) of the Income Tax Act. These measures were prescribed to instill compliance amongst taxpayers and create a database of potential taxpayers receiving rental income.
The main question is do taxpayers really know what constitutes rental income and what the applicable allowable deductions accruing to them are? Let us delve more into this:
What constitutes rental income:
- Monthly Rentals
- Payments for right of use
- Lease premiums
- Services rendered in lieu of rent
Your deductions:
- Utilities
- Maintenance and Repairs (but not improvements)
- Advertisements
- Mortgage interest
However, taxpayers are to watch out for the following,
- Section 15(2a) of the Income Tax Act – Fiscalization for Income Tax purposes
One cannot deduct expenses subject to VAT without a valid fiscal tax invoice.
- Income reconciliation – Taxpayers should ensure rental income declarations made on financial statements should tally with those made on VAT returns. In the case of variances, penalties shall be raised.
- Section 4A(1)(c) of the Finance Act - Taxpayers should ensure that when rental income is received 100% in foreign currency, such income tax should be accounted for as if 50% was earned in local currency. Also, when the ratio of rental income received in local currency exceeds 50%, such tax shall be accounted for in the currency of trade.
- Compliance with fiscalization – Taxpayers should ensure that they meet the requirements of fiscalization and the FDMS. Failure to comply as stipulated by Public Notice 59 of 2025, will result in the non-issuance of Tax Clearance Certificates to taxpayers.
- Paragraph 4(v) of the Third Schedule to the Income Tax Act – Exemption of the first US$ 3,000 accruing to taxpayers above 55 years.
- Value Added Tax Registration- This is applicable to property owners who have surpassed the US$ 25,000 threshold to register for VAT.
- All individual property owners are reminded that they are declared as the Ultimate Beneficial Owner to ZIMRA by their tenants. Hence, being compliant at this stage will help avoid future heavy penalties.
How Baker Tilly Can Assist Property Owners in Zimbabwe
Ensuring Tax Compliance:
- Preparing and submitting accurate tax returns (Income Tax, VAT, PAYE, CGT, etc.) on time.
- Keeping up to date with changes in tax legislation and advising on their implications.
- Ensuring compliance with specific requirements like Fiscalisation Data Management System (FDMS).
Specific Tax Areas:
- Value Added Tax (VAT): Providing guidance on VAT registration, calculations, and compliance.
- Capital Gains Tax (CGT): Advising on the tax implications of selling assets.
- Income Tax: Helping businesses understand their income tax obligations and minimize their tax burden.
By leveraging the expertise of Baker Tilly, property owners in Zimbabwe can navigate the complexities of the tax system, minimize their tax liabilities, and ensure compliance with all applicable laws and regulations. This allows them to focus on their core business activities and achieve their financial goals.
Tax consultant at Baker Tilly
References
- Income Tax Act (Chapter 23:06)
- Value Added Tax Act (Chapter 23:12)
- Finance Act (Chapter 23:04)
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