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What is the Final Deduction System? This is a system whereby the employer is directed to withhold employees tax (PAYE) from the employee’s remuneration in such a way as to ensure that the amount so withheld monthly and in the year of assessment is as nearly the same as the income tax liability that is expected from the employee concerned.
Who qualifies to be on FDS? All employers as defined under Paragraph 1 (1) of Part I of the Thirteenth Schedule to the Income Tax Act (Chapter 23:06) (Income Tax Act).
How does FDS work? FDS aims at ensuring that the P.A.Y.E. to be withheld in any year of assessment is the same as the final Income Tax liability for the employee concerned. Under the FDS, the employer continuously calculates the cumulative tax liability on the total remuneration as it is paid to the employee by allowing deductions and credits as and when they are incurred.
The employer is required to deduct P.A.Y.E. according to the P.A.Y.E. tables availed by the Zimbabwe Revenue Authority (ZIMRA). Which deductions are allowed against remuneration payable to an employee under FDS?
Only specific deductions provided under the Income Tax Act are allowable against remuneration payable to an employee. The following deductions are allowable against the remuneration payable to an employee:
Pension Contributions Pension contributions are deductible up to the statutory restriction of US$5 400 per annum. Where the employee is a member of several pension funds and the contributions exceed the statutory restriction, the excess pension should be disallowed and recorded in order to reduce the taxable portion of the pension on maturity.
Professional, Trade or Technical Associations Subscription fees paid to registered bodies by qualified members are tax deductible in full in the year in which they are paid. Subscriptions to sporting or recreation clubs are not tax deductible.
Tradesman’s Tools Costs of tradesman’s tools are allowed in full on purchase and on replacement (if it is in terms of the employment contract). Only qualified tradesman such as journeymen are eligible for such deductions. Trainees and apprentices do not qualify for this deduction.
What are tax credits? Credits are specific amounts provided under the Finance Act (Chapter 23:04), deductible against the tax payable by a person. Credits reduce the employee’s tax liability when granted.
What credits are allowed under FDS? These are listed in the Finance Act and briefly explained below:
Mentally or Physically Disabled Person’s Credit A credit of US$900 per annum is deducted from the Income Tax chargeable to an employee where it is proved that the taxpayer, his spouse or child is mentally or physically disabled (but not blind) to a substantial degree.
Normally the employee should get a letter from a specialist doctor stating the nature of the disability. In the event of any portion of the credit not fully utilised by the employee, it is allowable against the Income Tax chargeable for his/her spouse. Both spouses should however submit Income Tax returns for the relevant tax year to enable the transfer of the unutilised credit to be effected.
Elderly Person’s Credit A credit of US$900 per annum is deductible from Income Tax chargeable to a taxpayer, where he/she has attained the age of 55 prior to commencement of the year of assessment. If the period is less than 12 months, the amount referred above is reduced proportionately. This credit is however not transferable.
Blind Person’s Credit A credit of US$900 per annum is deductible from the Income Tax chargeable to a taxpayer who is blind. Any portion of such credit which is not applied is allowable as a deduction from the Income Tax chargeable to his/her spouse. Both spouses should however submit Income Tax returns for the relevant tax year to enable the transfer of the unutilised credit to be effected.
Credit for cost of purchasing invalid appliances (allowable to Zimbabwean residents only) A credit of 50 percent of the total cost incurred in respect of appliances used by a taxpayer, his spouse, or any child as a result of any mental, or physically disability is deductible from the Income Tax chargeable to the taxpayer. Examples of invalid appliances include wheelchairs, artificial lamps, leg calipers, crutches, spectacles or contact lenses.
Medical Expenses credit (residents only) A credit of 50 percent of the amount paid is granted. Medical expenses include the sum of payments made for:
Services rendered by a medical or dental practitioner;
Drugs and medicines supplied on prescription;
Any accommodation, maintenance, nursing, and treatment at a hospital, maternity home, nursing home, surgery, clinic or similar institution;
The conveyance by ambulance including air ambulance;
The amount of any contribution paid to a medical aid society.
What happens in cases where there is an unutilised portion of the tax credit against the Income Tax chargeable to the employee? In the event of any portion of the credits not being fully utilised during the month, it should be carried forward to the next month. It should however be stated that the credit is not supposed to be brought forward into a subsequent or different tax year. Credits exceeding monthly P.A.Y.E should not give rise to tax refunds.
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