• Monday, May 27, 2024
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Taxing gains arising from disposal of capital assets – the CGT


Taxation is arguably as old as mankind. In his book – Income Tax Law and Practice in Nigeria, Ola, C. S. said apart from revenue to the government, taxation is important to all, and taxes collected come back to the taxpayers in the form of social amenities.

Almost everything we own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. Capital gains are the profits realized from the sale of assets a price that is higher than the purchase price. When a capital asset is sold, the difference between the cost sale and the sales price is a capital gain or a capital loss. You have a capital gain if sales price is higher than cost of sale. The reverse is the case for a capital loss.

Capital Gains Tax (CGT) is a type of tax levied on capital gains accruing to individuals and corporations. It is a tax applicable to capital gains accruing to any person (company or individual) on the disposal of a chargeable asset. Capital gains taxes are triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur capital gains tax on the shares until they are sold.

Not all disposals are subject to CGT; only chargeable assets are. Chargeable assets are all forms of property, including options, debts and any form of property created or acquired by the person disposing it, or otherwise coming to be owned without being acquired. Landed properties and buildings are the main income yielding assets in Nigeria.

Most countries’ tax laws provide for some form of capital gains taxes on investors’ and individuals’ capital gains, although capital gains tax laws vary from country to country. In Nigeria, CGT was originally introduced by the Capital Gains Tax Act of 1967 with a rate of 20 percent but effective from 1998, the CGT rate was revised to 10 percent. The legislation currently governing taxation of capital gains is the Capital Gains Tax Act CAP C1 LFN 2004.

Capital gains are excluded from taxation under the Companies Income Tax Act (CITA) to avoid double taxation since such gains are subject to tax under the CGT Act. Assets situated outside Nigeria are chargeable to CGT on the amount received in or brought into Nigeria. In the case of a non resident, CGT is on any part of the gains received or brought into Nigeria.

Disposal to a connected Person

When a taxpayer transfers his/her capital asset to say, his wife, this is seen as a transaction between ‘connected persons’. In this case, the chargeable gains will be calculated on the basis of the market value of the asset at the date of transfer. Section 24 of the CGT Act, 2004 provides that a person is ‘connected’ if;

a. That person is the individual’s spouse,

b. A trustee of a settlement with any individual who in relation of the settlement is a settler, or

c. A person is connected with any person with whom he is in partnership and with any person the spouse or relative of any person with whom he is in partnership.

Continues next week

Embuka Anna