A trust is an arrangement between a founder and trustee under which assets are held by the trustee for the benefit of beneficiaries.
It is a product of a contractual arrangement and differs from a company, which needs to be registered in terms of the Companies Act. A trust, even though it is not a legal persona, has a separate identity from the people who form it.
It is not owned by any one and it never dies, unless terminated by the trustees or sequestrated for failing to pay its debts.
Assets that are transferred to a trust are legally and technically separate from the individuals who form the trust.
Thus, in CIR v Mac Neillie’s Estate 1961 (3) SA 833 (A) at 840F-G it was pointed out that like a deceased estate, a trust, if clothed with juristic personality, would be like a persona or a legal entity consisting of an aggregate of assets and liabilities.
Neither our authorities nor our courts have recognised it as such a persona or entity. It is trite law that the assets and liabilities in a trust vest in a trustee.
The learned authors De Waal and Schoeman-Malan in Introduction to the law of Succession, 3rd Ed at p.157-158, point out the following in general about a trust: “(a trust) as a legal institution is often used in the context of the law of testate succession”.
In general, a testator resorts to this legal institution if he wishes to benefit a particular beneficiary (the trust beneficiary) but wants to place ownership and/or control over the assets in the hands of another person (the trustee).
It is also possible for a trust to be created not for the benefit of some individual or individuals but for some interpersonal purpose (the so-called charitable trust).
A trust can also be created among living persons (inter vivos) and outside the context of the law of succession for, say, business purposes.
It has been said that although in theory a trust is not a separate legal person, in practice it comes very close to being one, and that the mere fact that ownership of the trust assets vests in the trustees does not mean that they have a beneficial interest in the assets (Estate Kemp v MacDonald’s Trustee 1915 AD 491 at 503-4).
In Hofer v Kevitt NO 1998 (1) SA 382 (SCA), it was pointed out that the trustees have a fiduciary duty to administer the trust assets for the benefit of the beneficiaries at all times. Therefore, trust property, though named in the name of a trustee, is not subject to the claims of a trustee’s creditors or subject to a trustee’s obligations.
A trustee, on other hand, is not required to have a beneficial interest in trust property other than compensation for his services. He violates the duty owed to beneficiaries and is liable for personal liability for any loss or damage suffered by them.
Zimbabwean income tax law defines “person” as follows: “person” includes a company…and, in relation to income the subject of a trust to which no beneficiary is entitled, the trust; it goes further to expand on the phrase above as follows: “income the subject of a trust to which no beneficiary is entitled” means income the subject of a trust created by a trust instrument.
It is clear from the above that a trust would only be liable to tax in Zimbabwe where it is a non-vesting trust.
In many jurisdictions, a trust is regarded as a tax transparent entity or conduit pipe through which the income flows to the beneficiaries.
An element of a conduit pipe entity is that tax paid on income earned through an entity should receive the same tax treatment as income earned directly by an individual. Income paid as an annuity is the only one which does not retain its identity in the hands of the beneficiary.
A trust, in relation to income the subject of which no beneficiary is entitled to, is regarded to be ordinarily resident in Zimbabwe in terms of section 2(3) (c) of the Act if part of its income is derived from sources in Zimbabwe or the trustee is ordinarily resident in Zimbabwe; and the person by whom the trust instrument was made was ordinarily resident in Zimbabwe at the time he made the trust instrument.
In conclusion, the effect is that a beneficiary who receives income from a trust resident in Zimbabwe is deemed to be deriving his/her income from a source within Zimbabwe despite him not being a resident of Zimbabwe. On the other hand, income and capital distributions made by a non-resident trust to a resident beneficiary are not taxable in Zimbabwe.
Amounts paid as dividend and interest to a beneficiary will be taxable to beneficiary with a vested right despite the trust not being a resident of Zimbabwe where income accrues or is received at a time the beneficiary is a resident of Zimbabwe.
Meanwhile, Matrix Tax School invites you to take part in the upcoming Conversion for Tax Preparers from July 21-23 at Kadoma Rainbow Hotel and Chengeta Safari Lodge .
Tapera is the founder of Tax Matrix (Pvt) Ltd and chief executive of Matrix Tax School. He writes in his personal capacity.