If you have an asset that you want to sell or lease out, it is essential to know if such an asset falls under capital gain assets. If so, it means you are obliged to pay a tax on the asset. This tax is known as capital gains tax. This article will give an overview of capital gains tax (CGT), which includes assets that are subject to this type of tax as well as how to calculate it.
What is Capital Gains Tax?
A capital gains tax is simply the tax charged by the tax authorities on profits made from sales or exchange of certain categories of assets by individuals or corporations. In Nigeria, 10% of profits made on such assets are paid as capital gains tax. The Capital Gains Tax Act of the Nigerian Constitution makes provisions for this capital gains tax. It is, however, necessary to note that capital gains tax is only applicable when gains are made on the sale of an asset. Assets considered for capital gain tax include jewelry, stocks, bonds, and real estate properties.
While CGT is 10% of capital gains, the tax authorities provide guidelines for determining allowable expenses, which is what can be deducted from the sales proceeds before arriving at the capital gains.
How to Calculate Capital Gains Tax
The formula for calculating capital gains tax is as follows:
- Record the sales proceeds of the asset disposed
- Get the net sales by deducting the allowable expenses as stipulated by the tax authority
- Deduct the original cost of the asset, which gives you the capital gains
- Multiply the capital gain by 0.1 (10%) to give you the capital gain tax
What are Allowable Expenses?
Taxing authorities expect that you deduct allowable expenses from sales proceeds to arrive at the Net Sale Proceeds. Allowable expenses include:
- Selling fees: These are expenses incurred while marketing or advertising the asset. These include the amount spent on banners and advertising agencies.
- Professional fees: These are fees paid to professionals, such as surveyors, accountants, and commissions.
- Refurbishing cost: This is the amount spent on improving the asset before disposal takes place.
What If I Sell a Part of an Asset?
When a part of an asset is disposed of or sold, it is still subject to capital gains tax. The problem, however, in this case, is to identify the original cost of the part sold. This requires a more sophisticated formula and is calculated as thus:
For example, if you buy a box of jewelry for ₦1 million and decide to sell a part of it after five years, and after selling that portion of the jewelry for ₦700,000, the remaining part is priced at ₦2.2 million, what will be the capital gain, assuming you spend ₦50,000 as allowable expenses?
To determine the actual portion of the sold part, the formulate recommended by the law is as follows:
X ÷ (X + Y) × Z
X = Sales proceeds of portion disposed
Y = Market value of the portion not disposed
Z = Original cost of the whole asset (acquiring cost)
Using this formula, we can calculate the capital gain of the part disposed of using the example below:
X = ₦700,000, Y= ₦2.2million and Z= ₦1million.
Therefore, cost of part not sold is ₦700,000 ÷ ₦700,000 + ₦2,200,000 = 24.1%
(0.241) 24.1% multiplied by ₦1,000,000 = ₦241,379.31
You can now calculate capital gain as thus:
|Net Sales Proceeds||₦650,000.00|
|Less cost of the part sold||(₦241,379.31)|
Capital Gains Tax is 10% of ₦408,620.69, which equals to ₦40,862
Depending on the entity that sells out a property, there are two tax collection authorities in charge of capital gains tax. While the Federal Inland Revenue Service collects capital gain tax on properties sold out by corporate entities, tax on gains made when individuals sell a property is paid to the State Internal Revenue Service.
Which Assets are Subject to Capital Gains Tax?
Any sold property is subject to capital gains tax. You are said to dispose of an asset when you lease, transfer, or sell it to another individual or corporation. The amount accrued from this transaction is known as capital gain, and you are obliged to pay capital gains tax on it.
Which Assets are Not Subject to Capital Asset Tax?
Some assets are exempted from capital gains. They include:
- Shares, stock, and other government securities
- Any registered society
- Gains made when an educational institution of a public figure is sold
- A registered company under the co-operative society law of any state in Nigeria
- Gains generated from statutory bodies
- Gains made from decoration for gallantry conduct
- Gains made from takeovers provided there is no cash payment
- Assets transferred as compensation for loss of job or office
- Gains made when an individual sells out his only property which does not exceed one acre
- Gains made when an asset is sold for a business purpose provided that the proceeds are used to acquire another property
- Gains accrued from retirement benefit scheme
- Any diplomatic body
Knowing which assets are subject to capital gains tax is necessary. This article has provided, among other information, which assets are subject to capital gains tax and which ones are not subject to CGT. Also, pay attention and study the steps for calculating capital gains tax as explained in the article.