Have you ever heard of Capital Gain Tax? It seems like such a big financial jargon. However, this article will help you understand it better.
History of Capital Gains Tax in Nigeria
Capital Gain tax was introduced in Nigeria by the promulgation of Decree No. 44 called The Capital Gain Tax Decree 1967. This was on the 19th of October 1967. It is said that one of the main reasons for the imposition of the capital gain tax is that the Nigerian government needed funds when the civil war was ripe in the country.
What is Capital Gains Tax
To simply put, Capital gain tax is the taxation levied on Capital Gains. A capital gains itself is simply an increase in the value of a capital asset over its actual purchase price, which thus gives it a higher value. Usually, the capital gain is not realized until the asset or investment is sold. For example, if land that has been acquired for over 10 years is sold, the price at which it was purchased 10 years ago and the new price at which it is sold is the capital gain.
Capital Gains is the excess gains from the sales of an asset over the original cost of that asset. Such assets could include land, building, stocks, equipment and even any currency other than the Nigerian currency, copyrights, bonds and others. Capital Gains Tax (CGT) is a tax levied on the gains obtained from disposal or sales or exchange of certain kinds of assets. This means that there are particular assets that are subject to the Capital Gains Tax. In Nigeria, Capital Gains Tax is calculated as 10% of the profits from the sale of capital assets.
Capital Gains Tax is recognized in Nigerian law, under the Capital Gains Tax Act. It is governed by Capital Gains Tax Act, Cap C1 LFN 2004 (as amended). All qualifying assets are subject to Capital Gains Tax as long as there is a gain. In Nigeria, Capital Gains Tax accrues on an actual year basis. Capital Gains Tax pertains to all gains accruing to a taxpayer (whether individual or company) from the sale, lease, exchange or transfer of assets. The chargeable interest is subject to a capital gains tax of 10%.
Such chargeable assets may be material or immaterial and can be situated in or outside Nigeria. However, when the taxpayer or the company does not reside in Nigeria, the tax will only be levied on the amount received or brought in Nigeria.
While Capital Gains Tax is 10% of a taxpayer’s Capital Gains, the tax authorities in Nigeria provide guidelines for calculating how the Capital Gains Tax is arrived at and deducted. Expenses considered when calculating Capital Gains Tax are as follows:
Sales Proceeds
Net Sale Proceed
Deduct: Cost of Acquisition
Capital Gains
Less: Allowable Expenses
What is Allowable Expenses
Certain expenses known as allowable expenses must be deducted from the sales proceeds before arriving at the Net Sales Proceeds. Allowable expenses include the following:
- Selling expenses such as advertising and marketing cost spent before the asset was sold
- Fees paid for professional services to professionals such as Estate Agents, Solicitors, Surveyors, Accountants, Estate Evaluators, commissions, etc.
- Cost of repairing or improving the asset before its disposal
Note that expenses that are typically considered under the company income tax are not considered under Allowable expenses. These include staff salaries, payment to suppliers, utility bills, etc.
How to Calculate Capital Gains Tax on an Asset
Step 1: Identify what the Sales proceeds of the asset is after you have disposed of it.
Step 2: Deduct the allowable expenses (this is determined by the tax office). This will help you arrive at the Net Sales Proceeds.
Step 3: To get the Capital Gains, deduct the cost at which you acquired the asset originally from the Net Sales proceeds
Step 4. Multiply the Capital Gains by 10% to get the Capital Gains Tax.
Frequently Asked Questions about Capital Gains Tax
What if I sell part of an asset?
Selling a part of an asset falls under partial disposal of assets. This is still subject to Capital Gains Tax. When part of an asset is sold, you will need to determine the cost of the part being disposed of.
ASSET CHARGEABLE
Chargeable assets include the following property whether or not they are situated in Nigeria
- Options, debts and incorporeal property generally
- Any currency other than Nigerian currency
- Any form of property created by the person disposing of it
Are all Assets Sold subject to Capital Gains Tax?
No. The list below contains assets that are exempted from Capital Gains Tax
- Gains exempted from Capital Gains Tax include those that arise from disposal of assets related to life insurance policy, Nigerian government securities, stock and shares etc.
- Gains are not chargeable where trustees or nominees transfer assets to beneficiaries because they are not considered to be disposing of the assets.
- Gains are not chargeable upon disposal of business assets where the proceeds are spent on acquiring new business assets
- Gains are not chargeable for Capital Gains Tax when the money is obtained by way of compensation or damages for any accidents, wrong or injury suffered by an individual.
- Gains are not chargeable for businessmen who trade under section 32(1) of the Act, where gains obtained on the sales of old business assets are used to procure new and similar business assets.
Note: For gains which are also liable to be taxed abroad, the double taxation treaties apply. - Gains are not chargeable on Stock, shares, and other government securities
- Gains are not chargeable on Ecclesiastical, charitable or educational institutions of a public
character - Gains are not chargeable on any statutory or registered friendly society
- Gains are not chargeable on any registered co-operative society in Nigeria
- Gains are not chargeable on any trade union registered under the Trade Union Act
- Gains accruing to statutory bodies are not chargeable
- Gains arising from acquisition and mergers are not chargeable as long as there is no cash payment made
- Gains are not chargeable on private residences as long as it does not exceed one acre
- Gains are not chargeable on private vehicles
- Gains are not chargeable on retirement benefit scheme
- Gains are not chargeable on any diplomatic body.