Generally, trusts are created to protect income generating assets or to ensure that property or assets are managed for the benefit of heirs.
In some circumstances, even organisations or corporates may set up a trust that operates a charitable foundation as part of corporate social responsibility (CSR) to help the society and the less privileged.
In such instances, such trusts may be construed to be free from any taxes on the basis that they may be predominately donor-funded, their main activities being for charity and not to earn profit. But it is important to note that such institutions are not exempt from tax. To be precise, trusts may be required to register for Value Added Tax and income tax.
In this article, words importing the masculine shall be deemed to include the feminine.
Trusts
Basically, a trust is a fiduciary relationship in which an individual or corporate gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party or parties, i.e. the beneficiary. Let us now have a look at what the tax laws say about trusts.
Enter income tax
Having regard to the Income Tax Act, it is imperative to note that in terms of the said Act, a trust is neither an exempt person nor is its income exempt from tax save when it is established for public purposes. The Income Tax Act provides that “amounts included in gross income shall be exempt from tax to the extent indicated…” for “a trust established for public purposes…”
From the above, it is clear that the exemption is only applicable to a trust that is established for public purposes. Conversely, a trust established for private purposes is required to register for income tax. For avoidance of doubt, a trust’s activities and the beneficiaries, in the event of a dissolution, are key in determining whether it is established for public purposes.
For clarity, a foundation that is established through a trust and whose beneficiaries are family members ceases to be for public purposes even though it may perform charitable activities to the general public. This technically means that such a trust should register and account for income tax on any excess income arising from operations that is not utilised towards endeavours of the foundation.
On the other hand, if such a foundation designates the general public or government as the beneficiaries on dissolution, it will be classified as a established for public purposes, thus its income will be exempt. Let us now turn to VAT.
Enter VAT
The VAT Act basically requires any person who carries on a taxable activity continuously in or partly in Botswana and whose annual value of taxable supplies exceeds or is likely to exceed P1m to compulsorily register for VAT. For avoidance of doubt, the term “taxable activity” basically means provision of goods or services, whereas “taxable supplies” are basically those goods or services that are ordinarily chargeable to VAT at 12 percent or 0 percent.
The critical aspect to note is that any person is required to register for VAT whether the supply of goods or services is conducted to make a pecuniary profit or not. Therefore, a trust being regarded a person for VAT purposes is required to compulsorily register for VAT where the annual value of its goods or services that are ordinarily chargeable to VAT at 12 percent or 0 percent exceeds or is likely to exceed P1 million.
Well, folks, we hope that was insightful. As us the two Yours Truly say goodbye, remember to pay to Caesar what belongs to Caesar. If you want to consult, join our free Tax WhatsApp group or to know about our 9 tax e-books, send us a text on 71815836. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
