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Tax is not the main consideration

There is a general belief that trusts are formed to reduce or avoid or postpone tax.  This is seldom true.  This is a wrong belief.  If such a thing has to happen for some reason or the other, Commissioner General has powers to disregard the so called trust and tax income and further charge penalties.  Rather, the basic reason is to make an arrangement to obligate the trustee to protect beneficiaries' interests.

Conduit or "See Through"

Generally, Tax law sees the trust as a conduit or "see through".  Based on this principle, a trust would pay the tax that beneficiaries would have paid had the trust not existed.  The conduit principle also applies to the source of income from a trust.  For example, dividends, which are tax-free, remain tax-free as they pass through a trust to a beneficiary or rent held by a trust that passes through a beneficiary is taxed as rent in the hands of trust.  It is therefore legally possible to split the income horizontally beneficiary-wise and vertically nature of income-wise.  Conduit principle can never be used to evade tax and when it will be impossible to tax the beneficiaries and in the case of minor children.

Botswana Tax Laws on Trusts

Botswana Tax Act defines a “trust” to include a will or other testamentary disposition; and a deed of donation, settlement or other disposition.  If an amount accrues to a trust for the benefit of the beneficiary, it shall be included in the gross income of the Trust which shall pay tax in the same sum as would have been charged if such amount had been included in the gross income of the beneficiary.  Sometimes a beneficiary’s income will accrue to the Trust but cannot be passed on to the beneficiary until the happening of an event.  In this case, Trust has to pay the tax in the name of the trustee (for the income that it is unable to pass to beneficiary because the stipulated event has not happened).  This is why when any amount accrues to a minor child, the Trust is liable to pay tax on it.

Generally and as a matter of rule, when a settlor or donor settles or donates assets to a trust, capital transfer tax or donation tax is payable because trust is an arrangement independent of trustees.

An Illustration

Let us explain this with a simple example. 

Assume you have a property of P 2.5 million.  Assume it fetching you an income of P 250,000 giving rise to a profit of P 200,000 after expenses of P 50,000.  There two beneficiaries getting P 100,000 each.  In this case, if you form a trust, then generally speaking, Trust pays capital transfer tax on P 2.5 million.  Transfer duty is also paid.  Trust also pays tax on P 200,000 that accrues to beneficiaries at amounts that those beneficiaries would pay. 

If you formed a company then it would pay tax on P 200,000 at 22% and then would pay dividends on the balance profit after deducting 7.5% withholding tax. 

If you held it in your own name without forming a company or trust, then you pay personal income tax on P 200,000 and then you will donate the balance to the two beneficiaries who may be liable for capital transfer tax.

Deemed Income

Deemed income provisions that apply to a company, can't equally apply to Trusts.  Where however trusts are formed without substance only to evade tax, Commissioner General has powers to disregard any arrangement or scheme and Trust is an arrangement basically.

Community Trusts and Public Benefit Trusts

When it comes to community trusts or public benefit organisations or sports clubs, Botswana Tax Act treats such trusts as a deemed company.  From the business income of such trusts applications (or appropriations) of funds to further the objectives of the trusts are allowed as deductions.  Even such application of funds within a period of 6 months after the year end may be allowed as a deduction from the business income.  Department Guidance Note 1  (DGN1) explains position well and provides for forms for seeking approval of the Commissioner General for applications (or appropriations) requiring deduction from business income of public benefit trusts. 

Botswana Tax generally

For general information on Botswana Taxation, please read https://www.rsm.global/botswana/insights/doing-business-botswana/taxation. 

[Note: This is for general information and whatever is stated may not exactly apply in your particular situation.  Please speak to us and obtain specific advice before making decisions.]