What does Capital gains tax mean to you?
Before delving into the definition, we need to quickly illustrate how Capital gains tax came by as part of the history of taxation in Nigeria. Capital gains tax was introduced in Nigeria in 1967 when the Nigerian government realized to need to acquire more revenue to deal with the forthcoming civil war.
The Capital gain tax Act became effective in April 1967. The provision is applicable to transactions effected by companies in the same manner they are applicable to transactions effected by individual.
Capital gains tax was initially introduced at the rate of 20% in 1967, however there was a revision of the rate in 1998 to 10%. This and other revisions brought about the current legislation of the Capital Gains Tax Act CAP C1 LFN 2004.
As a business (either as a company or individual), once your proceeds on the sale of certain kind of assets is more than the amount you bought the asset, then the difference is termed to be Capital gains for you. For such gains, the Nigerian law stipulates a tax on profit accruing from such transactions and this is known as Capital gains tax.
What is Capital gains tax – using the Capital Gains Tax Act
According to the Nigerian tax law that there is a charge at 10% on gain from on the disposal of chargeable qualifying assets. This is known as Capital Gains Tax.
On disposal of chargeable assets, the gain that you obtain from the disposal of such asset is known to be Chargeable gain. Such assets are generally assets that are not habitually offered for sale or constitute your stock-in-trade. What this means is that you are not selling these assets in your ordinary course of business.
What are the example of chargeable assets?
- Options, debts and incorporeal property generally
- Any currency other than the Nigerian currency
- Real Estate – Buildings, land.
- Precious metals
- Art works and other collectibles
So you mean all the assets I sold are subject to Capital gains tax?
There are certain assets that are exempt from the Capital gains tax:
- Profits arising from the sales of stocks and shares, Nigeria government securities, such as premium bonds, treasury bonds, savings certificate as issued under the Savings Bonds and certificate Act
- Gains on the sale of an asset provided that the proceeds is wholly used for the acquisition of a new asset
- Gains from a retirement benefit scheme
- Disposal of life assurance policies
- Gains accruing to any local government council
- Gains on decorations that are awarded for valour or gallantry conduct
- Gains from diplomatic bodies
- Gains from cooperative, statutory or any registered friendly society.
- Institutions of a public character
- Ecclesiastical or charitable institutions
- Trade Union registered under the Trade Union Act
- Profit from private vehicles
- Compensation for injuries that are wrong and suffered on individuals,
- Gains accruing from any company, being a purchasing authority established by or under any law in Nigeria, empowered to acquire any commodity in Nigeria for export from the country or any gains
What happens if I transfer my asset to another person?
This type of transaction is known as transactions between connected person. In this situation, Capital gains tax will come in on the basis of the market value of the asset at the date which it was transferred.
Market value means the current price at which you can sell the asset in an open market.
The Capital Gains Act defines connected persons for an individual as
a If the person is the individual’s husband or wife, or relative, or husband/ wife of the relative, of the individual.
b If the person in his capacity as a trustee, is connected to any individual who in relation to the settlement is a settler, and with any person who is connected to such an individual.
c if the person is connected with any person whom he has a partnership with, and with the spouse or relative of any person with whom he is in partnership with.
The Capital Gains Act also establishes that a company is connected to another company if
d The same person has control of both companies or if the person has control of one and the persons connected with him has control of the other or , or if he and the person connected with him has the control of the other.
e If the group of two or more persons have control over each company, and the group either consists of the same persons or could be regarded as consisting of the same persons by treating a member of the group as replaced by one person with who he is connected.
f A company is connected to another person if the person has control over it or him and the persons connected to him have control of it.
How do I compute Capital gains tax?
The Capital gains tax Act defines the processes for computation and the deductions from the proceeds of sale after the certain expenses have been deducted to arrive at the net capital gain.
Certain allowable expenses are deducted from the Sales proceeds to arrive at the Net sales proceed. The cost of acquiring the asset is also deducted from the net sales proceed to arrive at the Capital gains. The capital gains tax at 10% is therefore charged and deducted from the Capitals gains and remitted to the government.
Amount Asset was disposed XXX
Deduct: Allowable expenses (XXX)
To arrive at
Net Proceeds of Sale XXX
Less cost of
Acquiring the asset (XXX)
To arrive at
Capital gains XXX
Then Charge 10% CGT (XXX)
You need to consider the following when making your computations:
- What amount of asset was disposed? (sales proceed)
- Identify the allowable expenses involved in the transaction and deduct from the sales proceed
- Identify the cost of acquiring the asset initially from the Net sales proceeds to get your Capital gains
- Charge 10% on the capital gains to arrive at your capital gains tax
What are allowable expenses?
These are expenses allowed in the computation of capital gains tax if the assets in question have qualified for capital allowance.
- Examples of such expenses include professional fees incurred in the disposal of the asset for example Accountants, lawyers, Estate Surveyors etc.
- Selling expense such as advert expenses
- The cost of renovating, restoring or developing the asset to a sell-able state before disposal
Please note that expenses that fall under the consideration of companies income tax or petroleum profit tax does not form part of allowable expenses under capital gains tax. For example electricity bills, admin expenses like payment of salaries and so on are not allowable expenses under capital gains tax.
Also note that assets that are disposed as part of stock in your ordinary course of business is not subject to Capital gains tax but companies income tax at 30%.
Certain expenses are classified as allowable deductions from the Sales proceed as illustrated under the Capital gains tax act
Let US TRY AN EXAMPLE NOW, SHALL WE?
Mr TaxProf disposed his building on the 26 of March 2017 for N100,00 and the following expenses was incurred:
Solicitors fees: N5,000
Estate Valuers feed: N5,000
He bought the house on 20 January 2010 for N40,000 and incurred the following expenses
Renovation expenses: N5,000
Let us now make our computations:
Amount asset was disposed N100,000
Less allowable expenses
Solicitors fees (N5,000)
Estate Valuers fees (N5,000)
Net proceeds from sale N85,000
Less cost of acquisition (40,000)
Chargeable gains N45,000
Capital gains tax @10% N4,500 (10% of N45,000)
Is this clear to you?
Have you heard of Roll over relief?
When you sell an asset and replace the asset with a new asset of the same class as sold. The seller of the disposed asset can therefore deduct the profit realized from the disposal of the old asset from the cost of the new asset thereby postponing the payment of CGT on such gain.
Roll over relief is partial and full.
The effect of roll over relief is to reduce the cost of the new asset which has a resultant effect on the capital gains of the new asset upon its eventual disposal.
What are assets that are qualified for roll over relief. They are classified into classes and:
Class 1 (A) asset are buildings of any type or part, or any structure; permanent or semi-permanent in the nature of building owned for the purpose of trading.
Class 1 (B) Plants and machinery used for the purpose of trading.
Class 2 asset – Ships
Class 3 assets – Aircraft
Class 4 asset – Goodwill. Please note that for goodwill, the proceeds on disposal must be re-invested on or before 12 months after the disposal before the sale of such assets can trigger the roll over relief.
What are the contents of Capital gains tax returns
- Computations of payable capital gains tax
- Schedule of asset to include the proof of sale
- Evidence of asset improvement
- Filled self assessment forms
- Evidence of payment of capital gains tax
- Other information so relevant to the filing
The capital gains tax is being managed by the Federal Inland Revenue Service for corporate bodies and individuals resident in the Federal Capital territory (FCT), and also includes Police and Armed Forces.
Capital gains tax is also administered by the various State Internal Revenue Service for individuals based on residence rules.
Tax liability for capital gains tax arise on actual year basis when a chargeable asset is sold.
Now that we have provided the basic understanding of capital gains tax in Nigeria. Do you have comments and feedback for us? Please drop in the comments section below.