By Embuka Anna
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 everyone 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 at 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. The Federal Inland Revenue Service (FIRS) and State Boards of Internal Revenue are responsible for the administration of the CGT in Nigeria. 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 CGT 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% but effective from 1998, the CGT rate was revised down wards to 10%. 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 charged on any part of the gains received or brought into Nigeria.
Disposal to a Connected Person
When a taxpayer transfers his 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.
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.
A company is connected with another company if:
a. The same person has control of both or he and persons connected with him has control of the other.
b. Where a group of two or more person has control of 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 either group as replaced by a person with whom he is connected.
c. A company is connected with another person if that person has control of it or if it and that person connected with it together have control of it.
d. Any two or more persons acting together to secure or exercise control of a company shall be treated in relation to that company as connected with another and so will any person on the directions of any of them to secure or exercise control of the company.
Capital gains is the net consideration accruing to a person on the disposal of capital assets after the sum of the total consideration and expenses for acquiring the asset has been deducted. It is arrived at by deducting from the proceeds accruing to any person on disposal the following:
a) The amount or value of the consideration (in money or money’s worth) given wholly, exclusively and necessarily incurred in providing the asset.
b) Expenses wholly, exclusively and necessarily incurred on the asset for the purposes of enhancing its value being expenditure reflected in the state or nature of the asset at the time of disposal.
c) Expenses wholly, exclusively and necessarily incurred on the asset in establishing, preserving or defending the title or right over the asset.
d) The incidental cost of making the disposal, incidental costs of the acquisition of the asset or of its disposal includes fees, commissions or remuneration paid for professional services of any surveyor or valuer or auctioneer or accountant or agent or legal adviser and cost of transfer or conveyance including cost of advertising.
Expenses Allowable and Computation of CGT
Expenses allowable as a deduction in computing the gains or losses of a trade, business, profession or vocation for income tax purposes are not to be deducted in the course of determining the applicable CGT. So also are premiums or other payments made under a policy of insurance against the risk of any kind of damage or injury to lose or depreciation of any asset. This does not prevent the deduction of expenses allowable in the computation of capital gains under the CGT if the assets have qualified for capital allowances.
According to Ayua, I. A. in his book, The Nigerian Tax Law, the above position on deductions is to the effect that capital gains are liberally calculated for the purpose of the CGT law. In practice, capital gains are calculated by deducting the total cost of acquisition from net sales proceeds.
Example: Ola sold his property for N150,000 on the 2nd of June, 2005. He incurred the following expenses in the course of the sale:
Adverts (online and print): N 8,000
Legal service charge: N15,000
He bought the property on 13th December, 1981 at N60,000 and incurred the following expenses:
Agency: N10, 000
Renovation : N 10, 000
.Here is a computation of the amount of CGT due from Ola:
Proceeds from sale: 150,000
Legal service charge: 15,000
Net sales proceeds: 107,000
Less cost of acquisition: (60,000)
Capital Gains Tax = 10% of N 47,000
= N 4,700
The CGT Act exempts gains accruing to the following:
a) Ecclesiastical, charitable or educational institutions of public character.
b) Any statutory or registered friendly society.
c) Any co-operative society registered under the Trade Union Act, in so far as the gain is not derived from any disposal of any asset acquired in connection with any trade or business carried on by the institution or society and the gain is applied purely for the purpose of the institution or society as the case may be.
d) Gains accruing from any local government council.
e) Companies being purchasing authorities established under any law in Nigeria empowered to acquire any commodity in Nigeria for export.
f) Superannuation funds (pension provident or other retirement benefits fund, society or scheme approved by the Joint Tax Board under Section 20 (1) (f) of the Personal Income Tax).
g) Decorations, stocks and shares (the Act provides that where a person disposes a decoration awarded for valour or gallant conduct which he acquires otherwise than for consideration in money or money’s worth, such is not a chargeable gain. The Act also recognizes disposal of Nigerian government securities, stocks and shares as non-chargeable gains).
To prevent double tax relief on disposed assets, the Act provides that relief would be given in respect of replacement of business assets, compensation for assets lost and destroyed and in respect of delayed remittances from abroad. The relief would be in the form of tax deferred.
Offences and Penalties
With regards to the FIRS’ jurisdiction, offences and penalties under CGT is as provided for by Part VI of the FIRS Establishment Act 2007. On failure to deduct or remit taxes, Section 40 of the FIRSEA 2007 provides that “any person who being obliged to deduct any tax under this Act or the laws listed in the First Schedule of this Act but fails to deduct or having deducted fails to pay to the Service within 30 days from the date the amount was deducted or the time the duty to pay arose, commits an offence and shall upon conviction be liable to pay the tax withheld or not remitted in addition to a penalty of 10% of the tax deducted or not remitted per annum and interest at the prevailing Central Bank of Nigeria minimum re-discount rate and imprisonment for a period not more than three years”.
On general penalty, Section 49 (1) stipulates that “any person who contravenes any provisions of this Act for which no specific penalty was provided, commits an offence and shall be liable on conviction to a fine not exceeding N 50,000.00 or imprisonment for a term not exceeding 6 months or to both fine and imprisonment”.
Contribution to Federation Account
The table above shows a six year contribution of CGT, Stamp Duties and CIT to the federation account (in terms of actual monetary value and percentage). CGT recorded its highest contribution in 2013 with a total of N19. 66 billion and its lowest contribution was in 2011 with N775 million.
Whereas the contribution of CIT has been increasing steadily except in 2011 where it fell from N605.8 billion to N524.0billion, the contributions from CGT and Stamp Duties have been fluctuating between highs and lows as can be seen from the table.
However, the contribution from CGT surpassed that of Stamp Duties in 2009 and 2013. This is interesting given that for all other years, contribution from Stamp Duties surpassed that from CGT. Hence, an indication that the CGT, if properly harnessed would no doubt contribute immensely to the revenue purse vis-à-vis national development.
In other climes, the true economic gain rather than the accounting profit (sale price – cost price) is taxed by having an element of indexation that takes into account the inflation that affects the price of land and the price of appreciation of capital assets.
Challenges facing the CGT in Nigeria range from poor collection of primary data such as original cost of land, improper valuation of land, and lack of comprehensive taxation of equities.
In view of the need to focus on non-oil revenue sources, it is necessary to put administrative strategies in place so as to improve the performance of CGT. This could include piggy-backing the collection of CGT on stamp duties or making the payment of stamp duties precedent on pre-payment of CGT such that a purchaser of chargeable asset would be identified at the point of getting stamp duties. Taxing authorities should collect and properly harmonise all primary data regards land from Stamp duties commissioners, there should be a robust engagement of professionals like lawyers, accountants, estate managers and other various stakeholders.
The yield from CGT tends not to be as high as people would expect it to be. It will be needful to consider the interaction of the various tax laws particularly with the Land Use Decree of 1979 as well as other aspects of the law. This would help to clearly define the beneficiary of gains as well as the person that is taxable on the gain.
The CGT Act is currently being governed by the Capital Gains Tax Act CAP C1 LFN 2004. The Act as it stands is comprehensive enough to deal with a lot of the issues that exists especially in company land transfers of discreet properties owned in urban areas for which there is a clear market. However, the Act is not clear on how it will apply in the case of family land. For the most part, there should be a detailed review and amendment of the Act to align with global best practices.