Capital Gain may be defined as gains 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. Therefore, it is a tax chargeable at the rate of 10 per cent on capital gains arising from the disposal of capital assets. Capital gains mainly represent the excess of disposal proceeds realised over the cost of the particular asset.
Administration 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 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.
Some Highlights of the Provisions of the 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 installments over18 months, the chargeable gain shall be apportioned to the affected assessment years in proportion to the amount of the installments 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
Chargeable Persons
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.
Chargeable Assets
Examples of chargeable assets are:
• 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, • Chattels sold for more than N1, 000 in any tax year.
Persons / Institutions Exempted
By law, any ecclesiastical, charitable, or educational institution of a public character, statutory or registered Friendly Society and co-operative society registered under the co-operative Societies Act are exempted. Same also applies to Local Government Council, purchasing Authority Company and corporation established for fostering economic development of any part of Nigeria. Also included in the the exemption list are, Trade Union registered under the Trade Unions Act, provided, The gain is not derived from the disposal of any assets acquired in connection with any trading or business activity carried on by such Institution or Society. The gain or profit is applied solely for the purpose of the Institution or Society.
Other items on the list are the main or only private residence of an individual (including the gardens), Chattels disposed for not more than N1000 in a Year of Assessment, motor cars suitable for private use or a mechanically propelled road vehicle constructed or adopted for the carriage of passengers, life assurance policy, benefits from superannuation funds approved by the Joint Tax Board, gifts, government securities, including treasury bonds, savings certificates and premium bonds, Nigerian currency, disposal of Stocks and Shares (effective 1/1/98), disposal of Investments in Statutory Provident Fund, or Retirement Benefits Scheme, acquisition of the Shares of a Company either merged with, or taken over or absorbed by another Company, as a result of which the acquired Company loses its identity as a Limited Liability Company, provided no cash payment is made in respect of the Shares acquired, gains accruing to Diplomatic bodies and gains from disposal of Securities in a Unit Trust provided the proceeds are re-invested.
The Principle of Disposal
For the purpose of CGT, disposal arises where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition or any other disposition of assets. The disposal is deemed to have taken place even where no asset was acquired by the person paying such capital sums. Thus, specifically, disposal is deemed to have taken place where:
i. Any capital sum is derived by way of a compensation for loss of office or employment.
ii. Receipt of capital sum under a policy of insurance;
iii. On receipt of capital sum in return for forfeiture or surrender of rights or for refraining from exercising such rights
iv. Any capital sum is received as consideration for use or exploitation of an asset.
v. Any capital sum is received in connection with or arises by virtue of any trade, business, profession or vocation.
Non-Allowable Expenses for the Purpose of CGT
• Any allowable expenses under the provision of PITA, CITA and PPTA.
• Any insurance premium or other payments made under a policy of insurance against the risks of any kind of damage or injury to, loss or depreciation of any asset.
Computation Of Capital Gains Tax
• In the computation of capital gains that will be charged to CGT, the following steps should be followed:
• 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 per cent 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 @ 10 per cent
Connected Persons
Where in a transaction, one person has control over the other, a connected person transaction is said to have taken place. In such a situation, where transaction is not done at arm’s length, market value is used. Connected persons for this purpose include:
1. An individual wife or husband;
2. A trustee in settlement is deemed connected with the settler as well as any person connected with the settler;
3. Partners of a firm are deemed connected with one another as well as with the spouse of each partner; 4. A company is connected with another person if that person has control of it or if that person and persons connected with him together have control of it.
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:
Class I:
a) 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;
b) Any land occupied and used only for trading.
c) 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.
Some Special Circumstances in CGT
1. Assets acquired by gift and later sold: the imputed cost is:
i. The amount at which the asset was last disposed in a transaction at arm’s length if known, or if that is not known
ii. The market value of the asset at the date of transfer.
2. Assets devolving on death and later sold, Shall for CGT purposes be deemed to be disposed of by him at the date of his death and acquired by the personal representative or other persons on whom the assets devolve for a consideration equal to:
i. Where ascertained, price of the asset as at date of purchase; or
ii. Where unascertained, market value of the asset as at that date.
