TAXATION OF TRUSTS

DEFINATIONS

Tax is an involuntary amount paid by a person to the government to which

the person is under its governance .Trustees are appointed to act in
fiduciary capacity and their duty is to administer and distribute income and
capital of the trust until termination . In terms of section 2 of the Income
tax act, a trust is a person, for tax purposes, only in relation to income to
which no beneficiary is entitled‘. In the case of Gold Mining Minerals
Development Trust v Zimbabwe Miners Federation 2006 (1) ZLR 174 (H)
where it was held that; “A trust, in the wide sense, is any legal arrangement
by which one person is to administer property whether as an officer holder
or not, for another or for some impersonal object. In the narrow sense, a
“trust” exists when the creator of the trust hands over or is bound to hand
over the control of an asset which is to be administered by another for the
benefit of some person other than the trustee or for some impersonal object.

ACTS OF PARLIAMNT ON TAXATION

Various Acts of parliament in respect to tax were enacted as basis for the
collection of such tax such as Income Tax Act, Chapter 23:06,Finance
Act ,Chapter 23 :04 and Value Added Tax Act ,Chapter 23:12.

Value Added Tax (VAT)

Value Added Tax Act Chapter 23:12
In its sec the VAT Act includes a trust fund its definition of a person. In its
section 2 (1) the Act states that, person includes any public authority, local
authority, company or body of persons, whether corporate or unincorporated,
the estate of any deceased or insolvent person and any trust fund. Value
Added tax is paid on consumption of goods and services. VAT falls under the
brunch of indirect taxes. Indirect tax is the type of tax which tax. An
example of direct tax is corporation tax. Indirect tax is borne by someone
other than the person responsible for paying it to the tax authority. The tax
is often included in the price of a commodity. Indirect tax simply means that
the taxpayer indirectly pays tax to the authority when they pay for a
commodity. Thus, a trust is liable to pay VAT when it is purchasing goods
and services.

Finance Act [Chapter 23:04]

The FA is the revenue statute responsible for setting rates and amounts of
tax each year. It is commonly known as the Charging Act. The contents of
this Act are revised each year through debates in parliament. All other tax
statutes refer to the FA for rate on which an amount should be charged.
Amendments to the FA are issued out each year, which also contains
amendments of other statues.

In section 2 of the Income Tax Act [Chapter 23:06 a trust is considered is

a person, for tax purposes, only in relation to income to which no
beneficiary is entitled. This means that a trust cannot be taxed on its own in
the article by Partson Nyatanga titled A Guide to Zimbabwean Taxation
author calls it a conduit pipe. The author further on explain the section 2 of
the Income Tax Act by writing that a trust will only be taxable where it has
income which has not been distributed to any beneficiary.

The conduit pipe principle is also known as the Armstrong principle as it

was introduced in the Armstrong v Commissioner for Inland Revenue
1938 AD as read in the matter of ABC TRUST AND COMMISSIONER FOR
THE SOUTH AFRICAN REVENUE SERVICE. According to the conduit
trust income of capital that has been vested in beneficiaries is not taxed in
the hands of the trust, but in the hands of the beneficiaries.

In his article Partson Nyatanga states that trust income is taxable either in
the hands of the beneficiary or the trust itself. Identity of trust income Trust
income retains its identity in the hands of the beneficiary. The taxability of
income in the hands of a beneficiary depends on whether he has a vested
right to income. A vested right is a right belonging completely and
unconditionally to a person as property interest that cannot be impaired or
taken away without the consent of the owner.

There are three types of vested rights namely:

a) Clear vested right – this is where income has to be paid to a beneficiary
and the trustee having no discretion on the matter. Such income accrues to
the beneficiary and by nature, will be taxable in his hands.
b) Again a vested right - This is where a trustee, though having a discretion
over the amount to be distributed, any undistributed amount is nevertheless
accumulated for the beneficiary. The beneficiary is again, taxable on the
income.
c) Delay in the vesting of right – this is where the beneficiary‘s enjoyment of
the income is entirely at the discretion of the trustee. In such
circumstances, the trust is taxable on the undistributed income and the
beneficiary is taxable only on amounts distributed to him. Annuities are
however, an exception to this general rule.
Annuities are taxable regardless of whether any of the trust income from
which they are paid is exempt. Annuities are funds or other assets that are
transferred into a trust to provide income for the designated beneficiaries.