INTRODUCTION

In 1789, the American statesman Benjamin Franklin, while writing a letter to Jean-Baptiste Le Roy, quoted that “in this world nothing can be said to be certain, except death and taxes.” With death being an uncontrolled event, people have always strived for effective tax planning to minimise their tax exposure. Recently, the scope of wealth management and succession planning has extended beyond merely drafting wills. Rather, well-organized and effective systems have been implemented to safeguard family wealth, shield assets, guarantee business continuity, uphold privacy and minimize excessive tax liabilities. Arguably, the inadequacy of wills as long-term wealth preservation and management tools has been attributed to legal scrutiny regarding their validity and probate proceedings, which often consume substantial time before beneficiaries can enjoy, benefit, and be taken care of by the estate. Furthermore, the estate remains exposed to the liabilities of the deceased, and once probate proceedings commence, the contents of the will become public records, thereby limiting confidentiality and privacy and posing a potential risk of the intended beneficiaries getting nothing or an unfair portion. Consequently, many individuals are increasingly opting to establish Family Trusts incorporated under the Trustees’ Incorporation Act [Cap. 318 R.E. 2023]. A Trust offers a more sophisticated estate planning structure because it allows wealth to be managed and preserved across generations, even after the demise of the Settlor. Trusts also facilitate continuity, centralized asset management, privacy and orderly succession. Nevertheless, when considering the transfer of assets from a person to a Trust, the issue of achieving tax neutrality, meaning no tax liability, has consistently arisen. Normally, the transfer of assets to a Trust may potentially attract capital gain tax (CGT). This has usually been a major factor discouraging individuals from utilizing Trusts as an estate planning tool. It is important to note that a person may achieve tax neutrality or zero CGT when transferring an asset to a Trust if they meet the conditions prescribed under the Income Tax Act, Cap. 332, R.E. 2023 (“ITA”).

AN OVERVIEW OF SECTION 44 OF THE INCOME TAX ACT

Persons striving to attain tax neutrality or zero CGT on contemplated asset transfers should rely on the provisions of section 44 of the ITA. When an asset is moved between associates and all necessary conditions are satisfied, Section 44 allows for an exception of zero CGT. The rationale is that tax should not usually apply when the real economic ownership of the asset has not changed.

CRITICAL ANALYSIS OF SECTION 44

To achieve tax-neutral treatment under Section 44, a transaction must navigate specific substantive requirements, as highlighted hereunder:

1. First, either the person or the associate must be an “entity”, which, under the ITA, explicitly includes a Trust. Furthermore, Section 3 of the ITA defines an “associate” as including a relationship in which an individual controls or benefits from at least 25% of the entity’s rights to income, capital or voting power. A legal relationship can be formed by designing the Trust Deed in a way that allows the Settlor to maintain either a beneficial interest or managerial authority as a Trustee. In addition, the association and relationship can be declared or formed by identifying the Settlor, Trustees and Beneficiaries in accordance with the Trustees’ Incorporation (Transparency of Beneficial Ownership) Rules, 2024.
2. Second, the transferred property must immediately become a business asset, depreciable asset or trading stock of the While land is generally treated as a non-depreciable asset under the ITA, it legally transforms into a business asset the moment it is utilised for income-generating commercial activities.
3. Third, the law demands absolute continuity of the underlying ownership in the asset of at least fifty percent (50%). In a family trust structure, this condition is satisfied when the individual transferor retains enduring economic participation or beneficial rights within the
4. Fourth, both parties must satisfy the residency test, since Section 9 of the Trustees’ Incorporation Act provides that incorporated Trustees become a body corporate upon the issuance of a certificate of incorporation, and a Trust incorporated in Tanzania qualifies as a resident Additionally, if the Settlor and Trustees administer the affairs of the Trust within Tanzania, the residence requirement may validly be satisfied.
5. Additionally, the law requires that the Trust should not belong to tax-exempt categories for the purpose of income tax.
6. Finally, procedural compliance is vital, as the law requires that both the individual transferor and the Trust must jointly elect in writing and notify the Commissioner General of the Tanzania Revenue Authority (TRA) of their intention to invoke Section 44. Failure to strictly file this written notification can completely defeat the contemplated tax relief, as strictly underscored in John Epimaki Kessy v Commissioner General (TRA), Income Tax Appeal No. 388 of 2020, CAT at Dodoma.

CONCLUSION

A proper reading of section 44 of the ITA demonstrates that transfers of assets from an individual to a Family Trust may, where the statutory conditions are satisfied, qualify for rollover relief and neutral tax treatment. Nevertheless, the availability of relief depends entirely on the proper structuring of the Trust, careful drafting of the Trust Deed, and strict compliance with the statutory conditions under Section 44 (4). Family Trusts should not merely be viewed as succession tools but also as legitimate legal tools for lawful tax-efficient estate planning.

 

Authored by:

Fredy J. Mushi
Tax Consultant, Victory Attorneys and Consultants