VAT implications of Non-Profit Making Organisations

The VAT status of non-profit making organisations is a nuanced aspect of tax law that requires careful consideration and understanding. While these organisations often benefit from income tax exemptions due to their non-profit nature, the rules around Value Added Tax (VAT) are slightly different. This article explores the specific exemptions, the practical complexities of these rules and the broader economic impact on non-profit organisations.

Under the Zimbabwean VAT laws, certain supplies made by non-profits are exempt from VAT. This includes the provision of goods or services received as donations, or when non-profit organisations sell goods, they have produced, provided these goods consist of at least 80% of the donated materials. The VAT Act clearly stipulates that VAT applies to any supply made in exchange for a consideration (i.e., payment), irrespective of whether the transaction yields a profit.

However, complexities arise with how these rules apply in practice. For instance, if a non-profit organisation receives donated goods and uses them to produce new items for sale, the resulting products are VAT-exempt only if the original donations constitute at least 80% of their value. This provision enables non-profits to utilise donations without the burden of VAT on such transactions. The landmark case of Law Society of Zimbabwe v ZIMRA clarified that certain fees charged by non-profit organisations, such as subscriptions and professional development fees, were VAT exempt because they were considered products of donated goods or services. This case highlighted that the VAT exemption applies to income deemed as donations, not to income from activities generating a supply for consideration.

The key takeaway for non-profits in Zimbabwe is the critical need to distinguish between income derived from straightforward donations and income from activities that involve a supply for consideration. From an operational perspective, these VAT rules demand rigorous accounting and administrative practices from non-profits to ensure compliance and avoid potential tax liabilities. This diligence helps in maintaining fiscal responsibility and supports the integrity of the VAT system, ensuring that non-profits contributing to commercial activities pay their fair share of tax.

Moreover, the broader economic impact of these VAT provisions supports the sustainability of non-profits. By exempting VAT on donations and related activities, non-profits can channel more resources into their core missions such as community services, support for vulnerable groups, or other social welfare initiatives. Yet, by imposing VAT on commercial activities, the laws ensure these organisations contribute to the national revenue, maintaining a balanced approach that benefits both the economy and the societal goals of non-profits.

In conclusion, the VAT status of non-profit making organisations in Zimbabwe is governed by specific laws that differentiate between donations and supplies for consideration. While donations and activities involving substantial donated goods are VAT exempt, any supply made for consideration is subject to VAT, regardless of profitability. Non-profits must navigate these rules carefully to comply with VAT obligations and maximise their impact. Understanding these nuances ensures that non-profits can operate effectively, contributing to social welfare while adhering to tax regulations.

VAT dilemma of construction projects

The construction industry plays a crucial role in the development of any economy. With Zimbabwe’s economic development agenda being premised on 14 pillars under the National Development Strategy, infrastructure development is said to be central to the achievement of the country’s economic goals. In pursuance of the same, the government set aside money for the sector in the 2023 national budget. There are therefore a number on going construction activities in the country. It is critical to stress that the sector, like other sectors of the economy, is not immune to the tax system’s issues and must negotiate its way through the complex tax rules. The VAT complexities of the construction industry stem from the time horizon disparities between the conclusion of the construction contract, the undertaking of the construction and the eventual settlement for the job done. This stands out as one of the construction industry’s distinctive complications, as well as a possible risk to tax compliance, liquidity, and profitability, particularly for small construction enterprises.

By their very nature, construction projects are long term, in some cases spanning several years before the project concludes. The law provides that VAT in the case of construction, manufacturing or construction and assembly work becomes chargeable upon payment being made in respect of any supply becoming due, is received, or any invoice relating only to that payment is issued, whichever is the earliest (underlined own emphasis). The interpretation of what is meant by “any supply becomes due” is critical. Because the construction project is often delivered in parts, it is impractical to expect the “supply which becomes due” to be the full project value.

The building contractor and the contracting entity must agree when the works have been finished for a supply to become due. The view currently embraced by tax authorities and courts is that construction or assembly work is completed when a certificate of completion or progress is issued. This may be viewed as the date of signing a handover protocol denoting the client’s acceptance of the work. In order for this to be achieved the following three conditions should be met : (a) a formal acceptance protocol should be stipulated by the parties under the contract, (b) such formal acceptance protocols are common commercial practice in the field in which the service is supplied and (c) it must not be possible to establish the consideration due by the client before the client formally accepts the construction or installation work. In the absence of a clause in the contract stipulating the acceptance protocols as aforesaid, it appears the date the “supply becomes due” is when the contractor announces to the buyer that the services are complete and ready for handover. How the agreement is worded is a critical consideration in the determination of a tax point underscoring the point in time, rights and obligations
under the contract are exchanged by the parties.

The dilemma with construction contracts is that the process of works acceptance is often very long, consisting of multiple stages, and is never guaranteed to end successfully. When tax chargeability and invoicing date is to be conditional on the works becoming declared ready for acceptance, the contractor may find itself forced to issue an invoice and pay VAT although the contracting entity refused to accept the works and the invoice it received. If this happens, the contractor may find itself facing loss of financial liquidity as it will have to pay the VAT without itself being paid by the contracting entity for the work it performed. This stems from the fact that invoice is one of the three elements which may trigger VAT on a construction contract.
Moreso, VAT issue of front payments as indicated above is another problem, the time of supply is triggered when a supplier receives a payment. It is not relevant whether the goods or services were not physically supplied or performed at that time see: (Case L67 (1989) 11 NZTC 1,391). The fact that the contract is later cancelled does not void the supply. However, of essence is whether such upfront payment is a consideration for the supply or not. The VAT Act has defined term consideration to exclude a deposit, other than a deposit on a returnable container, whether refundable or not, given in respect of a supply of goods or services unless and until the supplier applies the deposit as consideration for the supply or such deposit is forfeited. Deposits are a customer’s way of reserving goods or services or a sum payable as a first instalment on the purchase of something or as a pledge for a contract, the balance being payable later. The far-reaching consequence of this is that the contractor should be able to demonstrate that the upfront payment is a deposit which has not been appropriated to him/her as part of the supply. Where the amount is an advance payment it can be argued that VAT is triggered when such advance is received. In practice an advance payment helps the business to pay its actual costs during a contract. The issue of VAT on deposit is a topic which requires an in-depth analysis, and we will deal with it in our future articles.

In the final analysis the contractor will become liable to VAT based on the progress report as approved by the client, where billing or actual payment has preceded the certificate of completion such payment or invoice, whichever occurs first will trigger the VAT point. The certificate of completion as approved by the client or invoice will force the contractor to declare and pay the VAT long before receiving payment from the client which represents the biggest VAT dilemma within the construction industry. The upfront payment also, although a much better problem to deal with, will trigger VAT even when services has not been performed unless it can be demonstrated that the payment is a deposit as described above. All these are VAT intricacies bedeviling construction contracts which contractors should manage to avoid noncompliance penalties which may take a huge toll on the business liquidity as well threatening business going concern.

Death and taxes

As the law surrounding taxation can be complex and often subject to interpretation, but what is clear is that death and taxes are inseparable. Even in times of mourning, taxes must be paid. Accordingly, there are tax implications of income and expenses received after the death of a loved one. The Income Tax Act provides guidance on this matter, stating that income received after death is generally taxable. This includes any earnings from investments, businesses, or rental properties that continue to generate income after an individual’s death. The only difference is that when death unfolds, one will not be able to manage his or her affairs the way they do now or the way they would have planned or wanted to. The legislation governing estate administration in Zimbabwe has evolved over time it is codified in the Administration of Estates Act [Chapter 6:01]. The Act provides for the administration of deceased estates, estates belonging to children or mentally defective or disordered people, as well as individuals who are absent from Zimbabwe and whose whereabouts are unknown. The Act also establishes the position of the Master of the High Court, as well as the appointment of curators and executors, and protects both creditors and beneficiaries. The article aims to take taxpayers through on the administration of estates.

A deceased individual is subject to two fees: the Master’s fees, which require all deceased estates to pay a tax of 4% of the estate’s worth to the Master of High Court. The estate should be able to cover its own costs if it cannot the beneficiaries may make cash contributions to avoid selling assets. Second, a deceased individual is liable to estate duty tax, which is levied on the value of estate that exceed a specified sum that is gazetted by the law payable to ZIMRA. The following is how estate duty is calculated: Total Assets – Total Liabilities – Principal Residence – Family Car – Rebate = Dutiable Amount. The estate duty payable becomes 5% of the Dutiable sum It is also paramount to note that estate duty applies to income that meets the threshold of US100 000, amounts less than this are exempted from the payment of estate duty only subject to the Master of High Court fees.

In Zimbabwe, the question “Are funds received after death taxable?” is dominant. A deceased estate is created through the operation of law due to death. When a person dies, a new individual known as the estate of the deceased person takes his or her place. As a result, there are different tax rules for living people and deceased people. There may be two assessments for the same person in the same year of death, namely pre-death assessment and post-death assessment. If a person dies while working or running a business, income and expenses received and paid prior to death are typically assessed in the period preceding the date of death, while income and expenses received after death are assessed in the period following the date of death. However, it is important to note that not all income is subject to taxation. There are two types of income received after death: income accruing to the deceased estate and income accruing to beneficiaries. Income accruing to the deceased estate refers to any income earned by the deceased individual before their death but received by their estate afterward.

Death of person does not change the nature of his income nor how it is taxed.  If an amount would have been income in the hands of the deceased, it will also be income when received by the executor. His remuneration, including voluntary awards given in respect of services rendered, remains employment income. However, the voluntary payments only apply to amounts received or accrued to the executor.  A voluntary award made directly to a dependent or heir of the deceased could be treated as an amount of capital in nature, since the dependent did not render any services. A deceased estate as a person will be represented by the executor or administrator, who will be responsible for collecting all income earned by the deceased, whether earned before death or after death. Once he receives the letters of executorship, he is also responsible for collecting debts, paying creditors, reducing the estate into possession, rendering accounts, distributing property to heirs, and wound up the estate. If the testator established a trust, the estate must be transferred to the trustees.

There are different principles applied when dealing with different items in the computation of the  deceased’s taxable income; the following are examples but the list is not exhaustive: cash in lieu of leave received by the executor of the deceased estate of civil servant is not taxable; bonuses and directors fees voted after death or which are not fixed in the Articles of Association or Shareholders Agreement are not taxable since the deceased had no right to the amount during his lifetime; leave pay under an employment contract, royalties on a book, bonus or directors fees fixed in the Articles of Association and contractual commission are taxable in the post death period; commission in terms of a contract or agreement which is paid after death, to the executor of a deceased estate will be taxable either in the hands of the deceased if it becomes due and payable before death or in the hands of the estate if it becomes due and payable after death; any income made by a taxpayer as director of a company or as an employee in respect of a right to acquire marketable securities, shall be deemed to have been made by him on the day before his death and shall be included in his income up to the date of death. Death may also result in life insurance policies being paid to the estate or beneficiaries, as well as other death benefits, pensions etc. These are often not taxable because they are capital in nature.