TAX NEWS - JUNE 2010

Botswana Tax: The Taxation of Inter Vivos Trusts in Botswana

by ADV. PETER O'HALLORAN, 02 June 2010 -- What is a trust?

It is an arrangement between a person, usually called a Settlor, although such person may also be referred to as a founder or a donor to the trust, and a board of trustees, appointed by such person, which board may include himself, in terms whereof the board is tasked with the administration of certain assets that may be donated to, bequeathed to (through a will) or sold to the board as trustees of the trust so brought about.

No one owns the trust and the assets are not owned by anyone save the board of trustees in their capacity as such.

The personal financial circumstances of the trustees as trustees cannot affect the assets thus administered and even the death of a trustee or founder will not affect the assets in any manner whatsoever.

Trustees have an onerous duty to administer the assets of the trust to the best of their skill and ability.

An inter vivos trust is one that is set up during the lifetime of the settlor.

The settlor would typically set up such trust in order to protect or increase assets for the sake of his family.

He and his family are in most cases the nominated beneficiaries of the trust.

Note that because the settlor transfers assets to the trust and no longer owns such assets personally, his risks that he would carry as a business owner, cannot affect such assets simply because the assets do not belong to him.

When a businessman or woman seeks bank finance for their business interests, the banks always insist upon security for the financial assistance in the form of personal surety agreements.

Such personal surety agreements are unbelievably onerous. Most cases of personal insolvency are caused because of sureties signed by business individuals.

Placing the assets into trust removes those assets from the ambit of the personal surety.

Is this somehow immoral or dishonest?

Well, consider the fact that bank surety documents contain legal passages, written in the Latin Language, which passages serve to limit the rights of the signee of the surety to certain legal remedies.

Further, consider the fact that such phrases are little understood, even by contemporary lawyers as Latin is no longer a prerequisite subject for the obtaining of the basic law degree.

Is it not questionable practice to take away the rights of a businessperson by means of a contract that contains language that he is totally unfamiliar with?

In any event, it is the good right of every law abiding person to make provision for his family.

That objective is exactly what a trust is designed to achieve.

An Inter Vivos trust is taxed in Botswana at 25 percent flat rate unless the income of the trust in the tax year is routed through to the beneficiaries of the trust.

How do beneficiaries receive a benefit from the trust? The answer is that the trustees decide together what is to happen with the trust income on an annual basis.

If a beneficiary has need of funds and the trustees, who have a full discretion as to whether to make an award or not, decide to allocate income to such person, then the income thus allocated is not taxed in the trust but in the hands of the beneficiary concerned.

Children under the age of 21 are taxed at the same rate as the founder, which in Botswana means a maximum rate of 25 percent, although the figure could well be lower.

The reader should also be mindful of the fact that certain types of income, such as local dividends, are free of tax in Botswana.

Such tax free amounts, when allocated to a beneficiary, retain that status in the hands of that beneficiary.