ACC 305

CHAPTER 1 and 2

Income Tax is charged to persons (individuals, trusts, companies) in the their own
name.

Section 12 “The taxable income of any person shall be charged to tax in the name of
that person”

Except in the following circumstances:

SCOPE OF CHARGE TO TAX

o Minor Children (S 13)

o Settlement And Wills (S.14)

o Trusts (S.19)

o Deceased Persons (S.16 & 17)

o Legally Disabled Persons(S.20)

o Partnership (S.21)

o Collective Investment Undertaking (S.22)

o Non-Resident Persons: (S.23)

o Representative Tax Payers (S.24)

MINOR CHILDREN (S.13)

There are cases where persons liable to tax can make the following to the benefit of children;

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 a) Donation
b) Settlement
c) Any arrangement with a minor.

Such acts are known as “settlements” and the person creating such disposition/arrangements is the
“settlor”.

A minor is person;

o Under 21 years age.

o With No legal capacity to enter into a contract.

A major, a parent or legal guardian;

o Major is responsible for the tax. That is would answer questions to CG on behalf of the
minor.

o Donations or settlement may generate income during the minority of the child- income
generated taxed in the hands of the settlor.

o Donations as per customs, & Donor (settler further invests the income on the donations)-
minor taxed

Case Law

KOHLER V COMMISSIONER OF INLAND REVENUE (1949 (4) SA 1022 (T), decided that
income on the income should be taxed in the hand of the minor.

Kohler had two minor daughters namely Maxine, Patricia and Sheila may.
Kohler donated 10 000 pounds to each of the daughters.
Income accumulated and was placed to their credit with various institutions and shareholdings.
A sum of 8728 and 9 pounds was derived out of the subsequent employment of the accumulated
income.

The Commissioner For Inland Revenue (C.I.R) included the above sums in the taxable income of
the father. The father objected to such inclusion.

JUDGEMENT:

o The income derived to a minor on the original donation by the father, it will be taxed in the
hands of the father i.e. Kohler.

o Whereas the income derived out of reinvestment of the income, it should be taxed in the hands
of the minor.

CIR V WIDAN (1955 (D), S.A. IN 226 (AD), income on income continued to be taxable in the hands
of the donor parent.

It is necessary to have all the facts of the case in order to determine whether or not any income of a
minor child accrued to him by reason of a donation, made by the child’s parent in a good intention or to
avoid tax.
Note the following points:
 Every case must be looked into separately.

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  If the intention of donation is to invest further income and to avoid tax, settlor is responsible
to pay tax.
 Income on income continued to be taxable in the hands of the donor parent.
 The mere recital of the number of transactions is sufficient to disclose a calculated
predetermined scheme to avoid tax.

SETTLEMENT AND WILLS (S.14)

ACCORDING TO S.14 (1) if any person for the benefit of another makes any settlement and imposing
a condition that the beneficiary cannot enjoy the benefits of the settlement until the condition is
fulfilled. In such a case the income of the settlement will be included in the gross income of the settlor
and taxed in the settlor’s hands.

This provision is made to control the tax avoidance. Generally the conditions imposed are fulfillment
of age, marriage, death etc.

TRUSTS
Trust includes a will or other testamentary disposition, a deed of donation, settlement or other
disposition (s.19 (2).
“Any amount accrued to a trust for the benefit of any person shall be included in the gross
income of the trust and the taxable income ascertained there from shall, except in a case to
which section 14 (2) [conditional trust] applies, be charged to tax in the name of the trustee in
the same sum as would have been charged if such amount had been included in the gross
income of such person”

REVOCABLE TRUSTS
A revocable trust is that where the settler retains the right to revoke the settlement. In such a situation,
the income derived out of the settlement to the beneficiary is included in the gross income of the settler
and the settler is liable to pay tax.

DECEASED PERSONS (S.16 & 17) AND TAXING PROCEDURE OF ESTATES

Worked prior to his death. (taxed in the name of deceased person)

(i) Where income is derived before a beneficiary for the income is located (tax in estate
name).
(ii) Where the income is derived after the beneficiary is established (tax beneficiary.
(iii) Where the beneficiary is a legatee (after legal formalities completed).

LEGALLY DISABLED PERSONS

Not capable of entering into a contract. Minors, mentally disabled persons and other persons disabled
under legal disability such as insolvent persons.

The incomes derived by these people on their own right [such as salary] will be included in their gross
income.

The taxable income of such people will be taxed in the name of the trustee.

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PARTNERSHIP (S.21)

Business run by two or more people with the common objective.

Partnership agreement.
No partnership law in Botswana.

COLLECTIVE INVESTMENT UNDERTAKING (S.22)

OBJECTIVES:
To collect the funds, securities, and other liquid financial assets from its members.
To invest these funds, securities and other liquid financial assets in various investments.
To spread over the risk to various members.
To allot units to the member.
To distribute the net income as per the unit holdings collective investment undertaking is explained
in s.21a.
If the collective investment undertaking is retaining the profits, then it will pay tax. If the profits
distributed to the members as per their unit holding, members are liable to pay tax.

NON-RESIDENT PERSONS: (S.23)

If a non-resident is not directly charged because of his non-availability in Botswana, his agent in
Botswana is charged to tax in the same amount that would have been charged to a non-resident.

An agent means a resident who has the control of non-resident’s property or a person appointed
by non-resident as an agent.

REPRESENTATIVE TAX PAYERS (S.24)

Cannot enter into a contract. Represented for tax purpose by others. Such people are known as
representative tax payers.
Persons who are legally not competent to enter into a contract are minors, persons with unsound
mind, insolvent persons, deceased persons etc., are represented by other competent persons.

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HOW TO CALCULATE THE INCOME THAT SHALL BE LEVIED TAX

GROSS INCOME

The total income that accrues to a person is generally called Gross Income. It includes both taxable and
non-taxable income.

Botswana Tax Law has deliberately broken sources of GROSS INCOME as below;
o Business,
o Farming,
o Mining & minerals,
o Employment income,
o Rental income & other premiums
o Other sources such as interest, royalties and fees.
o Property disposal considered as capital gain.

BUSINESS GENERAL (S 28 (1))

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BUSNIESS- FARMING & MINING -SEPARATELY TREATED AND OTHERS GENERAL
BUSINESS
SECTION 2 defines business as “any business, trade, adventure or concern in the nature of trade,
profession or vocation and includes the letting of any property”.

TRADE
The word `trade’ is wider than business. Trade includes business, profession, occupation, venture etc.
Smalberger Ja, (Cir V Pick ‘N Pay Employee Share Purchase Trust 1992 (4) Sa39 (A), 54 Satc 271 At
280) observed that one should apply common sense and business standards to decide whether an
activity is a trade or not.

United Kingdom, the courts are following the principles of `badges of trade’ to determine whether a

particular activity is a trade or not. (a feature or sign which reveals a trade)

THERE ARE SIX BADGES OF TRADE, NAMELY

(1) the subject matter of the transaction (giving a bike to your friend is not business)
(2) the number of frequency of similar transactions by the same person (selling once in a blue moon
your car – not business
(3) the length of the period of ownership (own a house for five years and sold – not a business.
(4) supplementary work done in connection with the property realized (purchase land & making plots,
sell them business
(5) the circumstances responsible for the realization (sold cows for daughter’s marriage – not business.
(6) the taxpayer’s motive (williams, p99). (purchasing cars, used for a few days and selling them –
business motive)

Professional firms such as `accounting firms’, surgery, consultancy etc. Considered as business activity

FRAMEWORK OF TAXATION.
GROSS INCOME LESS EXEMPT INCOME = ASSESSABLE INCOME.
ASSESSABLE INCOME – DEDUCTIONS = CHARGEABLE INCOME

In view of the amendment of 2011, if a person is “carrying on more than one business, all
amounts accrued to that person from all businesses except from farming, mining or any disposal
of property under section 35 (1), shall be deemed to have accrued from one business”.

EXAMPLE

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Smith is having two businesses one for sale of vegetables and other relating to butchery. He received
during the tax year the following gross income by sales.
Vegetable sale : P300 000
Butchery: P1200 000
He incurred the following expenses relating to the two businesses:
Cost of purchases:
Vegetables P200 000
Meat P600 000
Admin expenses P400 000
Advertisement P50 000

It is agreed that the expenses are incurred to vegetable and butchery business in the ratio of 2:3.
Required:
Chargeable income of Smith prior to 2011 and after if the same transactions took place.
VEGETABL BUTCHERY AS ONE
ES BUSINESS
GROSS INCOME (P) 300 000 1200 000 1500 000
LESS COST OF PURCHASES 200 000 600 000 800 000
100000 600000 700000
LESS JOINT EXPENSES 160000 240000 400 000
APPORTIONED IN THE
RATIO OF 2:3
ADMINISTRATIVE
ADVERTISEMENT 20 000 30 000 50 000
TAXABLE INCOME (80 000) 330 000 250 000

The total taxable income of Smith is P250 000. Prior to 2011 pay tax on P330000 and carry forward
of loss of P80000 for a period of 5 years counting from next year. Now loss of one business is clubbed
with the income of other business.

FARMING BUSINESS (S.29)

o Section 2 defines farming as carrying farming operations. Farming operations are livestock
developments, agricultural and pastoral farming.

NOT FARMING:

o Holding land for sale.

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 o Auctioning of cattle.

o brokerage on sale of produce.

o estate agents selling pieces of land to different people.

o Letting farm to someone else and receives income on letting.

o The following operations are not considered as farming operations.

o Getting water from land through boreholes and selling water.

o Collecting gravel from land and selling it.
o Livestock auctioneers
o Produce brokers
o Estate agents
o Letting farms to receive rentals.

o Two types of operations such as horses breeding and using them for horse racing.
Breeding horses come under farming business. Horse racing goes into the general
business and not considered as farming business.

MINES AND MINERALS (S.31 (1))

The mining income arises from the operations of mining. Mining operations are defined in s.2 of the
income tax act as `extraction of minerals from their natural site, and their treatment, transportation or
storage’. Note that mining operations are extended even to transportation of minerals and storing
them.

EMPLOYMENT INCOME (S.32 (1))

The amount received in cash or otherwise, accrued or deemed to have accrued to a person who is under
the contract of employment. The amounts received may be in cash or in kind.
You receive a free residential accommodation. Reasonable rent for the house will be calculated and
will be shown as your employment income for tax purpose. The following incomes will not be added
to the employment income for the tax purposes (s.32 (2)).
 The value of free medical attention provided or medical attention paid for by
the employer.
 The value of any free passage by air, rail, road or sea provided for an
employee, his wife or his dependent children pursuant to the terms of his
employment.

RENTS, PREMIUMS ETC. (S.34 (1)

Section 33 deals with the rents, premiums and improvements to land or buildings. Suppose you have
let out your building to Tembo, any amounts received from him will be treated as rental income and
will be charged to tax.

OTHER INCOMES SUCH AS INTEREST, ROYALTIES & FEES (S.33 (1))

Section 32 (1) states that interest, royalties and fees such as entertainment fee, management or
consultancy fee received or accrued will have to be taxed in the source of `other incomes’.

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INTEREST

Interest is the amount which you receive out of your savings either from the bank deposits, deposits in
the building society, post office savings account etc.
Exempt interest:
Interest on any subscription share issued by resident building society.
Interest from banks up to p7800 (xxxi) of second schedule).

WHT DEDUCTED TO RESIDENT INDIVIDUALS FROM BANKS AND FINANCIAL

INSTITUTIONS SHALL BE FINAL TAX AND THE INTEREST SHALL NOT FORM PART
OF THE INCOME OF THE RESIDENT INDIVIDUAL (Effective from 01 July 2012)

ROYALTY

Royalty is the amount, which you receive from the publisher of your book, or if you have leased your
land for mining, you may receive royalty per ton of mineral excavated.

PROPERTY DISPOSAL (S,35 (1))

Section 35 (1) is the general provision dealing with property disposal income. “the gross income of
any person for any tax year shall include any amount whether in cash or otherwise accruing to him on
the disposal of –
(a) Any movable or immovable property of a business carried on by him in botswana;
(b) Any shares in or debentures of a company; and
(c) A residential property;
(d) Assets of an international financial services center company situated in botswana
(15/1999).”
By reading this section, you will think that all incomes derived out of sale of movable or
immovable property of a business, sale of debentures or shares, sale of residential property,
sale of the assets of an international financial service center company. This is a general rule.
To this general rule a proviso is added stating this section is not applied to:
(a) To the disposal of any property in the ordinary course of business;
(b) To the disposal of any property by an international financial services center
company in the ordinary of business; or
(c) Any specified foreign exchange gain.

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