Implication of Private Trust Funds on the Nigerian Tax System

CONTRIBUTED BY ADAEZE UZOAGU

INTRODUCTION

Ronen Palan defines Trust as “a relationship in which a person or entity (the trustee) holds legal title to certain property (the trust property), but is bound to exercise that legal control for the benefit of one or more individuals or organizations (known as the beneficiary).”[1] Trusts were developed as a shelter from taxes being imposed in England by the Crown during the medieval times.[2] However, trusts are mainly used to facilitate the transfer of assets to estates, shield assets and a tool to preserve wealth and keep wealth for future families.

It would appear that a trust can also be defined as “a legal obligation on the part of a trustee (who directly controls trust assets such as property or shares) to hold or accumulate income and assets for the benefit of a group of beneficiaries (usually family members of the individual who settled assets in the trust in the first place)’’[3].

There are different kinds of trust, a public trust is primarily used as an investment tool for assets. They have been used at times to avoid income tax, which has raised concerns. However, it can be seen that most trusts are usually controlled privately and limited to a family.

In this article, we focus on offshore trusts as we analyse the nuances surrounding the disclosure and taxes of revenue related to a private trust arrangement.

Trusts are primarily used for investment ventures/purposes or they can be used for an existing business. Trusts are usually taxed differently from how companies are taxed. Companies are taxed on their income at 30% or 27.5% (depending on their size) and this tax is recouped by shareholders through ‘imputation credits’ in their tax returns.[4] Companies do not enjoy tax breaks such as a 50% per cent discount for capital gains.[5]

A trust would only be taxed if it is unable to effectively distribute all taxable income to the beneficiaries under the trust. Failure to do this would require it to be taxed at a personal tax rate. However, this occurrence rarely occurs as the trustee generally distributes all annual income. In order to avoid paying tax over 30%, a private company is usually used as the beneficiary under a discretionary trust. Also, another trust could be set up to be the beneficiary under the discretionary trust. Tax breaks such as a discount on capital gains tax are often given to trust instead of companies in order to reduce the tax a trust pays on the beneficiary’s behalf.[6]

It would appear that the use of private trust (discretionary trust) for the purposes of tax evasion cost the government approximately two billion dollars yearly. However, some of these taxes have been recovered but it would be impossible to recover all as some have been distributed to tax heavens offshore.[7] Discretionary trusts have been used to avoid income tax through the following ways;

  • A discretionary trust can be used to split income with a member of the family that earns low income so income tax is not taxed. This spilt stops the government from taxing since lower income earners are not taxed.
  • Avoiding tax on capital gains (distributions of untaxed capital gains from the revaluation of assets within a discretionary trust to beneficiaries does not attract Capital Gains Tax, although it does for fixed trusts).’’[8]
  • A beneficiary can be used to receive capital gains tax discount as a tax break even though they do not benefit from the trust and do not control the investments made by the trust[9].
  • Tax could be moved by using a chain of complex shell entities to offshore companies located in tax havens such as the British Virgin Island. [10]
  • ’Transfer of tax losses so that individuals not directly involved in an investment or business can benefit from the related deductions (mostly resolved via ‘trust loss measures in the 1990s but not for ‘family trusts’).’’[11]
  • A charitable trust can be used for this. Income can be transferred from other entities into a charitable trust that is controlled by the owner of the private trust.[12] It would appear that this defeats the purpose for which a charitable trust was created in the first place.[13]

Private trusts are frequently used as effective tools for wealth transfer. It is a fiduciary relationship in which the “trust creator” or “settlor” entrusts the “trustee” with property (which may be tangible or intangible) to be managed for the benefit of chosen individuals known as “beneficiaries,” in accordance with specified terms stipulated in a trust deed.[14]

Therefore, there is a tripartite relationship between the trust’s creator, trustee and the beneficiary (ies) in a private trust.

The taxability of income in the Nigerian system is been governed by the Personal Income Tax Act 2011 as amended (PITAM) which requires every individual resident in Nigeria to be taxable as a right. Hence, income received by a settlor or a beneficiary in Nigeria is very much taxable. Additionally, there is a chance that the Trust’s whole revenue, rather than just the amount distributed, will be taxed in Nigeria if it is administered there.[15]

In accordance with paragraph 1 of the second schedule to PITAM, the income of a Trust shall be deemed to be the income of the Settlor of the Trust in cases where the Settlor retains or has a right over the trust’s capital assets, retains or has a right over the trust’s income derived from its capital assets, uses the trust’s income by borrowing from it, and resumes control or the Spouse resumes control over the trust’s asset or income. In the aforementioned situations, there is a possibility that the Trust’s wholeincome will be subject to taxation in the hands of the Settlor.[16]

According to the PITAM’s second schedule, if a trust keeps some of its revenue (i.e., unclaimed income) and does not reinvest it, that money will be subject to tax in the hands of the trustee.

Given that an offshore trust will also be subject to the laws of the nation in

which it is administered, will this provision apply to offshore trusts?

The Settlor may be held accountable for the tax that must be paid on any

undistributed income in cases when the income of a Trust administered in

Nigeria is regarded to be the Settlor’s income based on the circumstances

previously mentioned.

So, can we conclude that a Settlor who resides in Nigeria will be accountable to tax on the untaxed income from his Offshore Trust, particularly if it is of a revocable or discretionary nature?

The tax authority has the ability to ignore the transaction and make any

modifications to the income of the individual or trustee that it deems necessary under Section 17 of PITAM.[17]  Section 17(3) of PITAM expressly provides that “for the purpose of this section “disposition” includes any trust, grant, covenant, agreement or arrangement”.[18]

Therefore, income gained via offshore trusts and transferred into Nigeria through a government-approved route will indeed be exempt from tax, it is important to be aware of the offshore trust arrangement’s nature. This is so that the tax authorities can use Section 54 of the PITAM to assess the Settlor or Beneficiaries of an Offshore Trust to tax on a best of judgement (BOJ) basis even though it cannot be stated that the “disposition” mentioned in the PITAM includes Offshore Trusts.[19]

CONCLUSION

In conclusion, Trust funds have a lot of advantages however, Taxpayers should be advised to pay closer attention to how their personal and commercial affairs are set up, particularly when it comes to storing overseas investments and assets. Additionally, taxpayers are encouraged to consult with seasoned tax experts for guidance on how to run their companies or investment holding structures efficiently from a tax perspective, particularly with regard to their offshore holdings and investments.

Key Terms: Trust, Private Trust funds, Trust fund and Taxation

REFERENCES

  1. Osasere Osazuwa, “Trust Beyond Borders; Offshore Trust Or Local Trust?” (2018).
  2. Olayinka Oluata, “Nigerian Tax Implications of Offshore Trusts” (2020).
  3. Suleiman Yahaya and Samira Lawal, “Private Trusts: Key Notes For Trust Creators, Protectors and Beneficiaries” (2022).
  1. Ronen Palan, ‘Tax Havens And The Commercialization Of State Sovereignty’ (2002) 56 International Organization.
  2. ibid
  3. ‘Ending Tax Avoidance, Evasion And Money Laundering Through Private Trusts – ACOSS’ (Acoss.org.au, 2020) <https://www.acoss.org.au/ending-tax-avoidance-evasion-and-money-laundering-through-private-trusts/> accessed 26 January 2020.
  4. Ronen (n24)
  5. ibid
  6. Isabeel (n18)
  7. ‘Ending Tax Avoidance, Evasion and Money Laundering through Private Trusts – ACOSS’ (Acoss.org.au, 2020) <https://www.acoss.org.au/ending-tax-avoidance-evasion-and-money-laundering-through-private-trusts/> accessed 26 January 2020.
  8. ibid
  9. ibid
  10. ibid
  11. ibid
  12. ibid
  13. ibid
  14. Olayinka Oluata, “Nigerian Tax Implications Of Offshore Trusts” (2020)
  15. ibid
  16. ibid
  17. Section 17 PITAM, 2011.
  18. Section 17(3) PITAM, 2011.
  19. Section 54, PITAM, 2011

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