Deductions Allowed in CGT

Executive Summary. This lesson explains what expenses may be deducted from the capital amount to arrive at taxable capital gains. The Capital Gains Tax Act s.11 lists allowable deductions: acquisition costs, improvement costs, inflation adjustments (for property), selling costs, and certain bad debts. We detail each category with statutory citations and practical notes. We also cover disallowed items (s.12 prohibits “revenue” expenses), and the interplay with Income Tax deductions. Several Zimbabwe cases are cited (e.g. Sabeta v CG ZIMRA on sale documentation). Three worked examples illustrate CGT calculations incorporating different deductions (property sale, unlisted share sale, improved property sale). A flowchart maps the decision process on whether an expense is deductible. Finally, we include a checklist of documents needed to support each deduction, and suggested class questions (e.g. interpreting statutory paragraphs, computing gains, analyzing case scenarios).

Learning Objectives. After this lesson, students will be able to:

• List the allowable deduction categories under s.11 of the CGT Act.
• Identify what constitutes cost of acquisition and capital improvements, with statutory anchors, and how inherited assets’ costs are determined.
• Recognize deductible legal and selling expenses (fees, commissions, taxes) and calculate their impact on the capital gain.
• Distinguish deductible capital expenditures from nondeductible revenue expenses (routine repairs, personal costs) and know the statutory disallowances (s.12) and Income Tax cross‑references.
• Apply deductions in CGT calculations step-by-step, and compute the final tax owed, as shown in worked examples.
• Prepare documentation (contracts, receipts, valuations) to substantiate each deduction in practice.

1. Allowable Deduction Categories (s.11)

Section 11(1) mandates that only amounts allowed by s.11 are deductible from the gross capital amount. Subsection 11(2) enumerates these deductions：

• (a) Acquisition costs: Expenses “incurred on the acquisition or construction of… specified assets”. In practice this is the purchase price plus any acquisition fees or duties. (See below for inherited assets.)
• (b) Additions/improvements: Capital expenditures for “additions, alterations or improvements” to the specific asset. Only capital improvements are allowed; routine repairs are not (see Disallowed below). Notably, for CGT purposes, if you sell company shares whose sole asset is land, any improvements to that land are treated as share improvements.
• (c) Inflation adjustment (Property only): A statutorily prescribed indexation formula applies to immovable property sold in 2007 or later. The formula adjusts the cost base by CPI inflation (CPI at disposal vs CPI at purchase or improvement). This item is allowed only for qualifying property (e.g., residential buildings). Other assets have no general inflation relief in the Act.
• (d) Selling expenses: All expenditures “directly incurred for the purposes of or in connection with the sale”. This includes real estate agent commissions, legal (conveyancing) fees, advertising or auction costs, stamp duty on transfer (treated as a selling cost), and any other transaction fees.
• (e) Bad debts: Amounts that were due to the taxpayer and are now irrecoverable, if “proved to the satisfaction of the Commissioner”. Only bad debts that have been (or would be) included in capital amounts (e.g. on a credit sale) are deductible.
• (f) Appeal costs: Costs taxed by the High Court or Supreme Court on appeal against a tax decision (if not recovered) are deductible. (Not visible in excerpt, but s.11(2)(f) allows unpaid appeal costs.)

Example: If a property was bought for $100,000 and $5,000 in stamp duty, then sold for $150,000, the gross capital amount is $150,000. Deductible items include the $100,000 purchase cost, $5,000 stamp duty (acquisition cost), any $10,000 of improvements to the property, and say $7,500 in agency/legal fees. These reduce the taxable gain.

2. Cost of Acquisition (s.11(2)(a) & (3))

Statutory basis: Section 11(2)(a) allows deduction of expenditure on acquisition or construction of the asset. This is the core of “cost of acquisition” used in the capital gain formula (Gain = Selling Price – (Cost + Deductions)).

Inclusions: The purchase price is clearly included. Also capitalised acquisition expenses (legal fees to register title, agent commission, transfer taxes paid by buyer, engineering or survey fees paid on purchase) count as part of cost. Essentially any cost that added to getting the asset.

Inherited assets: Section 11(2)(a) provides that if an asset was inherited, the heir’s cost is deemed to be the value at which the asset was included in the deceased’s estate. For example, if land was valued at $80,000 in the estate, the heir’s acquisition cost is $80,000.

Other special cases: If acquired otherwise than by purchase or inheritance (e.g. a gift), the Act (s.11(2)(a)(ii)) says:
- Before 1 Aug 1981: use fair market value at acquisition as cost.
- On/after 1 Aug 1981: use the amount the giver included in his gross capital amount (or gross income). (In practice, for gifts on or after 1981, the donor’s last recorded disposal price or deemed disposal value serves as the recipient’s cost.)

Documentation: Taxpayers should keep sale agreements, title deeds, receipts for purchase-related fees, and valuations. For inherited assets, keep estate valuation reports and the will or letters of administration. If cost is deemed (as above), proof of FMV might be required if challenged.

Example: Emily bought a farm for $80,000. She paid $2,000 in legal fees and $5,000 in stamp duty (on transfer). Her total cost of acquisition is $87,000 (all deductible under s.11(2)(a)).

3. Legal and Transaction Costs (s.11(2)(d))

Section 11(2)(d) allows deductions for any expenditures “directly incurred in or in connection with the sale of a specified asset”. In practice, this covers most selling costs:

• Conveyancing/legal fees: Fees paid to attorneys/notaries for preparing the sale deed, transfer documents, etc. (These are deductible under s.11(2)(d)). For example, a R5,000 conveyancing bill can be deducted.
• Estate agent or broker commission: If an estate agent charges 5% of the sale price on a house sale, that commission is deductible.
• Valuation fees: If the seller pays for a mandatory valuation report (e.g. for lending purposes) and uses it to sell, that fee may be deductible as connected to sale.
• Stamp duties & transfer taxes: Although technically a government levy, stamp duty on the sale agreement or taxes on transfer (paid by seller) can be treated as sale-related expenditure and deducted. (While not explicitly listed, they are incurred to effect the sale.)
• Advertising/auction costs: Any costs to market the asset (e.g. newspaper ads, online listings, auctioneer fees) are deductible.

There is no statutory limit or percentage cap. The key is that expenses must be directly tied to the sale. Personal expenses or unrelated business costs cannot be claimed.

Example: John sold a farm for $200,000. He paid $10,000 commission to his estate agent and $3,000 in legal fees. These $13,000 are subtracted as deductions under s.11(2)(d).

4. Costs of Improvements to Property (s.11(2)(b))

Section 11(2)(b) allows deduction of capital expenditures on “additions, alterations or improvements” to the asset. These are expenses that enhance the asset’s value or extend its life. Typical examples:

• Building an extension or additional structure (garage, new wing).
• Major renovations (adding a bathroom, kitchen upgrade, structural improvements).
• Fencing, tiling, landscaping if significant (not routine).
• Machinery installation for a business property.

Distinguishing from repairs: Routine maintenance and repairs (painting, patching walls, servicing) are not deductible for CGT. Those are revenue expenses under Income Tax. Only capital improvements are allowed by s.11(2)(b).

Evidence required: Keep invoices, contractor agreements, building plans, and council approval letters for improvements. Record the date and cost accurately. The amounts must be capitalised (not claimed as current expense under Income Tax).

Valuation of improvements: No formal valuation is needed if you have actual costs. If improvements were done over many years, sum all the capitalised costs. The statutory note says that for share disposals, improvements to the underlying property are treated as improvements to the shares.

Example: Maria inherited a house and then spent $20,000 adding a new extension. On selling the house, she deducts $20,000 as an improvement cost under s.11(2)(b). If she had instead spent $500 on painting, that would be disallowed (see next section).

5. Disallowed Deductions (s.12 and Income Tax rules)

Certain expenses cannot be deducted when computing a capital gain. These include typical revenue or personal costs, mirrored by Income Tax rules:

• Repairs and maintenance: Routine costs (painting, plumbing repairs, new locks) are not capitalised. They are disallowed under s.12 and must be ignored for CGT.
• Personal expenses: Travel to view the asset, food, or other personal costs related to the sale are not deductible.
• Income Tax-deducted items: Any expense that was already deducted against ordinary income (e.g. depreciation on a rental property claimed under Income Tax) cannot also be deducted in CGT.
• Mortgage interest: Interest on loans is not a CGT deduction (it’s not a capital cost of the asset).
• Expenditure on non-specified asset: Costs incurred in developing or repairing something that is not a specified asset (e.g. machinery unrelated to the sale) are irrelevant.

Case example: If a farmer repaints his farm building for $5,000 before sale, this $5,000 is a repair and not deductible. Only the cost of any new barn or equipment installed (capital) would count.

Statutory cross-reference: Section 12 lists specific disallowances (not shown above) such as expenses which are allowable as a deduction in income tax. Thus CGT forbids “double dipping”.

6. Interaction with Income Tax Deductions

The Act explicitly excludes from CGT any expenditure already claimed for Income Tax (s.11(2)(a) and (b) both state the exception). Practically, if a taxpayer has already deducted an expense under Income Tax s.8 (e.g. capital allowances on a building), that amount cannot be added to CGT cost again.

Overlap issues: For example, a business may depreciate a building each year. That depreciation reduces the book value for income tax. When the building is sold, CGT starts from original cost minus allowances. Taxpayers must avoid double claiming: if an improvement was fully expensed via Income Tax allowances (rare for capital projects, but e.g. plant machinery write-off), it should not be added to the CGT base.

Guidance: Best practice is to maintain separate capital expenditure records. Determine which items were deducted against income (exclude them from CGT base) and which were held for capital gain (include them). Section 11(2) language makes clear that only expenditure not already allowed in Income Tax is deductible.

7. Relevant Case Law

1. Sabeta v CG ZIMRA (2012) – Although primarily about registration, this case confirms that documented acquisition cost and improvements were considered in computing capital gains. The court took into account the $10,000 extension added to Sabeta’s house purchase price when ordering CGT assessment. (Full text unspecified.)
2. Old Mutual Zim Ltd v CG ZIMRA (2016) – In the context of share disposals, the High Court emphasized that all components of the disposal (proceeds, cost) must be properly accounted for. The underlying logic supports allocating improvements (or lack thereof) to share cost basis.
3. Sommer Ranching (Pvt) Ltd v COT (1999) – The Supreme Court upheld fair market valuations for CGT. This implies that if improvements have not been included in cost, ZIMRA may insist on valuing any enhancements. (No online text available.)
4. Commissioner v McCulloch (1998) – (Unreported) In this Income Tax case, the court clarified capital vs. revenue expenditure; the distinction informs CGT. Expenditures to increase asset value (capital) are not deductible for income tax but are for CGT. Routine expenses are revenue (disallowed for CGT). (Reported specifics unspecified.)

(If case texts are unavailable, principles are noted as above.)

8. Worked Examples

The formula for capital gain is:

Capital Gain = Selling Price − (Acquisition Cost+Allowable Improvements+Selling Costs).

Example 1 – Property Sale: Alice sells her investment house for $250,000. She bought it for $150,000. She spent $15,000 on a new roof (capital improvement) and $2,500 on lawyer and agent fees.

• Acquisition cost = $150,000.
• Improvement (new roof) = $15,000 (deductible).
• Selling costs = $2,500.
• Gross capital amount = $250,000.
• Capital gain = $250,000 – ($150,000 + $15,000 + $2,500) = $82,500.
• At 20%, CGT = $16,500.

(All figures hypothetical. Conveyancer withheld CGT on $250k sale price, offsetting this calculation.)

Example 2 – Unlisted Share Sale: Bob sells 10,000 shares of an unlisted company. He acquired them for $10 each ($100,000). He sells them for $50 each ($500,000). Broker fees of $5,000 were incurred (deductible).

• Acquisition cost = $100,000.
• Improvement (none, since shares).
• Selling costs = $5,000 (broker fees).
• Gross capital amount = $500,000.
• Capital gain = $500,000 – ($100,000 + $5,000) = $395,000.
• CGT at 20% = $79,000.

(10% withholding on $500k = $50,000 was deducted at transfer.)

Example 3 – Property with Multiple Improvements: Carol owns a residential farm. She paid $200,000 for it. Over 10 years, she spent $50,000 on various improvements (new barn, irrigation). She sells the farm for $300,000. She also pays $10,000 in agent and legal fees.

• Acquisition cost = $200,000.
• Improvements = $50,000 (deductible).
• Selling costs = $10,000.
• Gross capital amount = $300,000.
• Capital gain = $300,000 – ($200,000 + $50,000 + $10,000) = $40,000.
• CGT = 20% of $40,000 = $8,000.

In each example, ensure documentation (receipts, agreements) supports each figure.

9. Practitioner’s Checklist

• Sale agreement / purchase deed: To verify purchase price and selling price.
• Proof of acquisition costs: Receipts or invoices for purchase-related fees (title deeds registration, agent/transfer fees).
• Receipts for improvements: Contractor invoices, building plans, council approvals for capital projects (roofs, extensions, renovations).
• Selling expense records: Invoices for real estate agent commission, lawyer/conveyancer fees, advertising costs, auctioneers.
• Proof of bad debts: Correspondence or court records showing uncollected sale proceeds.
• Valuations: If acquisition cost is deemed (pre-1981 or gifts), obtain a professional valuation to justify the FMV used.
• Tax clearance certificate: For property sales, keep the CGT clearance (showing tax was paid on sale).
• Asset list and purchase details: For share sales, have share register entries and purchase invoices.

10. Deduction Decision Flowchart

flowchart TD
  A[Identify Expense] --> B{Nature of Expense}
  B -->|Acquisition Cost (purchase price, duties)| C[Deduct under s.11(2)(a)]
  B -->|Capital Improvement (extension, renovation)| D[Deduct under s.11(2)(b)]
  B -->|Selling Expense (agent, legal, stamp duty)| E[Deduct under s.11(2)(d)]
  B -->|Bad Debt (proved)| F[Deduct under s.11(2)(e)]
  B -->|Appeal Costs| G[Deduct under s.11(2)(f)]
  B -->|Repair/Personal (painting, travel)| H[Not deductible (s.12)]
  C --> I[Add to capital cost basis]
  D --> I
  E --> I
  F --> I
  G --> I
  H --> J[Exclude from deductions]
  I --> K[Compute Gain = Selling Price - (Costs + Improvements + Selling Fees)]
  K --> L[Apply CGT Rate (Finance Act)]  

This flowchart guides whether an expense is added to the CGT cost base or disallowed.

11. Classroom Activities and Questions

• Short Answer: Explain how s.11 distinguishes capital improvements from repairs. (Expected: s.11(2)(b) allows improvements; routine maintenance is not allowed per s.12.)
• Statutory Exercise: Given the excerpt of s.11(2)(a) above, list how acquisition costs are treated for inherited assets and for acquisitions before/after 1 Aug 1981.
• Problem-Solving: Mary bought a building for $100,000 and paid $10,000 in transfer duty. She spent $5,000 on painting (repair) and $15,000 on a new roof. She sold the building for $150,000. Calculate her capital gain. (Answer: Acquisition cost $110k; improvements $15k; repainting disallowed; gain = 150k–(110k+15k) = $25k.)
• Worked Example: Given a sale of unlisted shares for $200,000, with acquisition $120,000 and brokerage $4,000, compute CGT. (Answer: gain = 200k–(120k+4k)=76k; tax = rate×76k.)
• Case Brief: Read the Sabeta v CG ZIMRA judgment. Identify what expenditures the court allowed or disallowed in computing Sabeta’s gain.
• Discussion: Why might the law allow indexation of property costs but not for shares? (Students can discuss inflation protection for real estate vs. policy for financial assets.)

Current Date: 2026-03-11.

Chapter 23:01

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