Tax Education: Understanding Capital Gains Tax

INTRODUCTION

Capital Gains Tax (CGT) is a tax imposed on gains accruing to any person from the disposal of a chargeable. The Capital Gains Tax Act Cap C1 (as amended) provides for assets which the gains on their disposal will be chargeable to CGT and those that will not be chargeable to CGT (will all the limitations provided in the Act).

RATE OF CAPITAL GAINS TAX

CGT is at a single rate of 10% on gains accrued to any person on the disposal of chargeable assets after the deductions allowed in the Act in the computation of such gains.

CHARGEABLE ASSETS

Subject to exemptions granted in the CGTA, all forms of property are assets for the purpose of the Act, whether situated in Nigeria on not. These include the following:

  • Options, debts and incorporeal property generally
  • Any currency other than Nigerian currency
  • Any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.

ASSETS DISPOSED OUTSIDE NIGERIA

If an asset situated outside Nigeria is disposed by:

  • a person who is Nigeria a temporary basis (but for a period that exceeds 182 days)
  • any trustee and the seat of administration is outside Nigeria
  • disposal by a non-resident company

CGT will be charged on the chargeable gains received or brought into Nigeria. This means that the gain will be treated as accrued only when it is received or brought into Nigeria.

DISPOSAL OF ASSETS

In accordance with CGTA, an asset is deemed to be disposed where:

  • any capital sum is derived by way of compensation for any loss of office or employment (subject to exemptions granted under the Act)
  • any capital sum is received under a policy of insurance and the risk of any kind of damage or injury to, or the loss or depreciation of, assets
  • any capital sum is received in return for forfeiture or surrender of rights, or for refraining from exercising rights
  • any capital sum is received as consideration for use of exploitation of any asset
  • any capital sum is received in connection with or arises by virtue of any trade, business, profession or vocation.

EXEMPTIONS FROM CAPITAL GAINS TAX

The following are some of the exemptions from CGT as provided in the CGTA:

  1. Compulsory acquisition of land: Provided the person is not reasonably aware of the forceful acquisition by an authority or has not make any advertisement/willingness to dispose the asset.

2. Charities etc.: The gains accruing to any of the following bodies are exempted from CGT:

  • Ecclesiastical, charitable or educational institution of a public character
  • Statutory or registered friendly society
  • Co-operative society
  • Trade union
  • Local government councils

3. Retirement benefits scheme: Gain from any disposal of investment held by a person as part of any superannuation fund but so that where part only of that fund is approved under section 20 of the Personal Income Tax Act. This includes gains accruing to a person from his disposal of investment held by him as part of any national provident fund or other retirement benefits schemes established under the provisions of any Act or enactment for employees throughout Nigeria.

4. Decorations: A gain will not be a chargeable gain if it accrues on the disposal by any person of a decoration, awarded for valour or gallant conduct.

5. Stocks and Shares: Gains accruing to a person from a disposal by him of Nigerian government securities, stocks and shares is not regarded as chargeable gains. The government securities include: Treasury bonds, savings certificates and premium bonds.

6. Life assurance policies: No chargeable gain will accrue on the disposal of, or of an interest in, the rights under any such policy of assurance or contract except where the person making the disposal is not the original beneficial owner and acquired the rights or interests for a consideration in money or money’s worth.

7. Personal Injury: sums obtained by way of compensation or damages for any wrong or injury suffered by an individual in his profession or vocation shall not be chargeable gains.Compensation for loss of office not exceeding N10,000,000 shall not be regarded as chargeable gains.

8. Principal place of residence: Gains from the disposal of principal place of residence is exempted from CGT. However, if a person has more than a place of residence, the Act provides that the main place of residence must be determined.

9. Disposal for N1,000 or less: A gain from the disposal of an asset which is tangible movable property is not chargeable to CGT if the total value of disposal is less than N1,000.

10. Gifts: Assets acquired as a gift and disposed by a gift will not be considered for CGT. As a matter of emphasis, this only cover a disposal that does not include receipt of a value.

ALLOWABLE DEDUCTIONS

The following are the costs allowed by the CGTA as deductible from the sales proceeds from the disposal of an asset:

  1. Initial cost of the disposed asset
  2. Selling expenses including; advertisement & marketing costs towards disposal of the asset
  3. Professional fees (such as survey fees, accounting fees) towards disposal of the asset
  4. Cost of refurbishing or enhancing the quality of the asset before disposal

Any deductible costs under the Income Tax Acts in Nigeria are not allowed as deductions under CGTA (S. 14).

PART DISPOSAL

It is possible that an indefinable part of an asset is disposal and the other is not disposed. An example is when a part of a building is disposed and the identifiable part of the building is not disposed. Section 16 of the CGTA provides for how to determine the cost of the part disposal for the purpose of CGT. This is simplified with the formula below:

 A       Multiplied by C

A   + B

A – Sales proceeds of part disposed

B- Market Value of part not disposed

C – Cost of acquiring the whole asset

Example:

A part of a twin building acquired for N100million was disposed for a sum of N85million. It has been estimated that the market value of the other part of the building not disposed is N80million.

Suggested Solution:

Using the above formula, the cost of the part disposal will be:

                 N85,000,0000                  X         N100,000,000           =          N51,500,000

     N85,000,000 + N80,000,000

The chargeable gain will be N33,500,000. Therefore the Capital Gain is 10% of N33,500,000 (N3,500,000).

CONCLUSION

This write-up is strictly based on the Capital Gains Tax Cap C1 LFN (as amended). The amendments include the provisions of the Finance Act, 2019.

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