By Nneka Ifekwuna
A Capital Gain may be defined as profit arising from increases in the market value of capital assets to a person or corporate body, who does not habitually offer them for sale and in whose hands they do not constitute stock-in-trade.
It is gain from sales of any capital asset where the sale price exceeds the purchase price of the investment. Therefore, it is a tax chargeable at the rate of 10 per cent on the capital gains arising from the disposal of capital assets.
These are investments such as stocks, mutual funds, real estate, precious metals, art works and other collectibles. The increase or decrease in the value of such capital assets is taxed when sold. Income produced by investments is taxed as the income is generated.
Treatment of Capital Gains Tax
The CGT is under the management of the Board of the Federal Inland Revenue Service (FIRS) and it is administered by the FIRS in respect of corporate bodies and individuals resident in the Federal Capital Territory including members of the Armed Forces, Police and foreign Serving Officers.
The tax is also administered by the State Internal Revenue Service in respect of individuals based on the rules of residence.
Under the provisions of the Act, tax liability will arise on Actual Year Basis (AYB) when a chargeable asset is disposed. An aggrieved taxpayer or the respective tax authority can appeal against the decision of the tax authority to a conventional court or to the Tax Appeal Tribunal (TAT) as the case may be.
Highlights of some of the provisions of CGT Act
CGT is chargeable at 10 per cent on capital gains from the sale of capital assets. Capital loss on disposal of any asset is not deductible from capital gains on disposal of any other asset even if both are of the same type. Where consideration is payable by instalments over18 months, the chargeable gain shall be apportioned to the affected assessment years in proportion to the amount of the instalments payable in each of the years.
Chargeable gains are assessed on current year basis
Roll-over relief is available to any company acquiring a new asset to be used for the purposes of the trade in replacement of an old one. Gains arising from disposal of shares and stocks are currently exempted from CGT
Chargeable Persons and Chargeable Assets
A chargeable person is one who deals in a chargeable asset. A chargeable person may be:
A limited liability company, An individual
A limited liability company will remit its tax liability to FIRS while an individual will remit to the SIRS, with the exception of individuals resident in the FCT. Assets include all forms of property for the purpose of the Act whether situated in Nigeria or not. Including:
Options, debts and incorporeal properties. Incorporeal properties are assets that have values but are not tangible, e.g. goodwill, copyrights and patent rights.
Disposal of currencies other than Nigerian currency
All qualifying capital expenditure under CITA, PITA, PPTA or any form of property created by the taxpayer Chattels sold for more than N1, 000 in any tax year.
Gains chargeable by tax
Disposal of assets
Disposal of assets by a person where any capital sum is derived from sale, lease, transfer, assignment, compulsory acquisition or any other disposition of assets
Disposal of assets: provisions as to considerations:
Subject to the provision of this Act, a person’s acquisition of an asset and the disposal of it to him shall be deemed to be for a consideration equal to the market value of the asset. Where a person disposes by way of gift of an asset acquired by him by way of gift or otherwise, the person acquiring the asset on the disposal shall be deemed to have acquired the asset. In relation to any asset held by a person as nominee for another person or as trustee, this Act shall apply as if the property were vested in , and the acts of the nominee in relation to the asset were the acts of the person or persons for whom he is the nominee or trustee. The conveyance or transfer by way of security of an asset shall not be treated for the purposes of the Act as involving any acquisition or disposal of the asset
Where a person entitled to an asset by way of security deals with the asset for the purpose of enforcing or giving effect to the security shall be treated for the purpose of the Act as if it were done through him as a nominee. An asset shall be treated as having been acquired free of any interest by way of security subsisting at the time of any acquisition of it, and as being disposed of free of any such interest or right subsisting at the time of the disposal
Where an asset is acquired by a creditor in satisfaction of his debt or part thereof, the asset shall not be treated as disposed by the debtor or acquired by the creditor for a consideration greater than its market value at the time of the creditor’s acquisition of it, and if a chargeable gain accrues to the creditor on a disposal by him, the amount of the chargeable gain shall be reduced so as not to exceed the chargeable gain which would have accrued if he had acquired the property
Death: On the death of an individual, any asset of which he was competent to dispose of shall for the purpose of the Act be deemed to be disposed by him at the date of his death and acquired by the personal representative(s) or other person on whom the asset devolve Compulsory acquisition of land – a person shall not be chargeable to tax under this Act in respect of any acquisition and the disposal of land by reference to a disposal to an authority exercising or having compulsory powers. Any asset acquired or disposed of by any person chargeable to capital gains tax shall be deemed to have been so acquired or a binding duty to dispose of the asset or any right or interest
Exclusion of losses
In the computation of chargeable gains under this Act, the amount of any loss which accrues to a person on a disposal of any asset shall not be deductible from gains accruing to any person on a disposal of such asset.
The computation of any chargeable gains shall be the difference between the consideration accruing to any person on a disposal of assets and any sum to be excluded from that consideration, and there shall be added to that sum the amount of the value of any expenditure allowable to such person on such disposal.
The basic steps are:
Identify the sales proceeds
on the disposal of the chargeable asset. Deduct allowable expenses from the sales proceed to obtain Net Sales Proceed. Deduct cost of acquisition and other capital costs from the Net Sales Proceed to obtain the Capital Gains. Compute the capital gains tax liability by applying the applicable rate of 10% on the Capital Gains obtained above.
The above steps can be placed in a better format as follows: N N
Sales Proceeds xx
Less: Allowable Expenses (xx)
Net Sales Proceed xx
Deduct: Cost of Acquisition (xx)
Capital Gains/(Losses) xx
Capital Gains Tax at 10 per cent.
ROLL OVER RELIEF
This arises where a sole trader, partnership or limited liability company carrying on a trade, dispose of one eligible business asset and replaces it with a new asset of the same class as that sold. The seller will be entitled to deduct the capital gain arising on disposal from the cost of the new asset thereby postponing the payment of CGT on such a gain.
Roll over relief can be full, partial or no roll over relief.
The effect of this roll-over relief is to reduce the cost of acquisition of a new asset with resultant increase in the capital gain arising on eventual disposal.
Classes of assets eligible for roll-over relief:
Any building or part of a building and any permanent and semi-permanent structure in the nature of a building, occupied and used only for trading; Any land occupied and used only for trading. Fixed plant and machinery which does not form part of the building; Class II – ships; Class III – Aircraft
Class IV – Goodwill. However, the consideration arising on the disposal must be re-invested within Twelve months before or after the disposal before the rollover relief can be granted.