You might already know that Capital Gains Tax imposes a flat rate of 10% on chargeable gains, except those exempted by the Capital Gains Tax Act LFN of 2004 (as amended). However, as with every other type of tax in Nigeria, you need to know how to compute Capital Gains Tax when you dispose of assets and shares subject to CGT at a gain. In this article, we’d discuss what Capital Gains Tax is and provide an in-depth explanation of how to calculate CGT on disposal of shares, assets and for compensation for loss of office.
Read on.
How to calculate Capital Gains Tax in Nigeria would be discussed below:
-
What is Capital Gains Tax?
Capital Gains Tax, which is governed by the Capital Gains Tax Act LFN (2004) as amended, is imposed on chargeable gains accruing from the disposal of chargeable assets subject to CGT. This tax is charged at a flat rate of 10% of chargeable gains accrued.
All chargeable assets are subject to CGT when disposed at a gain, except the following mentioned below:
- Gains on stock, shares, and other government securities such as treasury bonds, premium bonds, and saving certificates
- Ecclesiastical, charitable or educational institutions of a public character (as long as the gain is not derived from any disposal of any asset acquired in connection with any trade carried on by the organization)
- Any statutory or registered friendly society
- Any cooperative society registered under the cooperative societies Law of any State in the Federation of Nigeria
- Any trade union registered under the Trade Union Act
- Gains on a decoration award for gallantry conduct
- Gains accruing from acquisitions, mergers, or takeovers, provided that no cash payment is made in respect of the shares acquired
- Gains on policies of assurance of deferred annuity unless the beneficiary is not the original owner, as in an estate
- Compensation for wrong or injury of libel, slander, enticement, loss of office in a personal or professional capacity
- Gains from the main or only private residence of an individual provided that the area does not exceed one acre
- Gains on private vehicles
- Gains on any asset used for the purpose of a trade or business, provided the gain is used for replacing the old asset sold
- Gains from a provident or retirement benefit scheme
- Unitholders of a unit trust, provided the proceeds are not reinvested
- Any diplomatic body
-
How to Compute Capital Gains Tax
Before we proceed with explaining how capital gains tax is calculated in Nigeria, we need to mention the allowable expenses that must be deducted from the sales proceed before arriving at the net sale proceeds. These include:
- Selling expenses, such as advertising and marketing costs spent before the sale of an asset
- Professional fees, such as fees paid to estate agents, surveyors, accountants, estate valuers, commissions, etc.
- Cost of refurbishing or improving assets before they are disposed
Having listed what the allowable expenses of CGT computation are, let’s dive into how to calculate CGT on the disposal of assets, shares, and compensation for loss of employment.
We’d begin with how to calculate CGT on compensation for loss of employment. Remember, we listed compensation for loss of employment as one of the exemptions CGT is not imposed on. However, it is only when the compensation for loss of employment is N10,000,000.00 and below that CGT is not applicable. But when the sum exceeds N10,000,000.00, CGT is charged on excess of N10 million accordingly.
To explain this better, we’d use an illustration of two civil engineers, Mr Kolawole and Mr Osaro who sustained injuries that left them incapacitated whilst they worked for A.T.A Civil Construction Company Limited. The company compensated Mr Kolawole with N11,000,000.00, while Mr Osaro was compensated N8,500,000.00. We would find out what the chargeable gains accrued to both former employees of A.T.A Civil Construction Company Limited are.
Let’s begin with Mr. Kolawole whose compensation for loss of work exceeded the maximum of N10,000,000.00 exempted from CGT. Below is the computation:
The compensation received = N11,000,000.00
Less: compensation exempt to arrive at chargeable gain
= N11,000,000.00 – N10,000,000.00
Chargeable gain = N1,000,000.00
CGT @ 10% of chargeable gain = N100,000.
For Mr. Osaro who received less than the N10,000,000.00 for compensation for loss of work, he isn’t liable to pay CGT.
For Mr Kolawole whose CGT is N100,000.00, according to the calculations above, his employer A.T.A Civil Construction Company Limited would be responsible for making the deduction of N100,000.00, at the point of payment. In addition, the CGT so deducted is expected to be remitted to the relevant tax authority not lesser than 10 days of the end of the month.
Next, we’d explain how to calculate CGT for the disposal of shares. But before we go into teaching you how to do so (with the help of several illustrations), we need to provide rules guiding the disposal of shares as contained in Section 30(2) of the Capital Gains Tax Act. Section 30(2) of the CGTA imposes tax on capital gains from the disposal of shares as follows:
- Where a person disposes shares in aggregate amounting to N100,000,000.00 and above in one or more Nigerian companies registered under the Companies and Allied Matters Act within 12 months, the gains from the proceeds will be liable to a capital gains tax
- Where the proceeds from a disposal of shares are reinvested in the acquisition of shares in any Nigerian company within the same year, tax shall be paid on gains from the portion of the proceeds not reinvested. However, shares transferred between a borrower and a lender in a regulated securities lending transaction shall be exempt from CGT
- Gains accruing to a person other than a person resident outside Nigeria from a disposal of shares in any foreign company are not exempt under CGTA and shall be liable to CGT in line with Section 4 of the CGTA
Based on the provisions of the CGTA concerning the disposal of shares, we would use an example to illustrate how to compute Capital Gains Tax when gains accrue from the disposal of shares. But before we proceed with the example, let’s outline the steps to be used in computing capital gains In the disposal of shares.
The sales proceeds from the disposal of the shares should first be identified, then, a deduction of the cost of acquiring the shares and all allowable expenses incidental to the purchase and disposal of the shares follows next to obtain the capital gain. The final step is multiplying the capital gain by 10% to arrive at the CGT.
Let’s get to the illustration right away. Assume that Ben Ama Nigeria Limited who owns shares in F.L.O Somoye Nigeria Limited valued at N100,000,000.00, disposed of its shares at N150,000,000.00 making a gain of N50,000,000.00. Thereafter, the proceeds were fully invested in the purchase of shares in Carseal Airline Nigeria Limited which was subsequently disposed
of at N140,000,000, without further re-investment. How would the computation of capital gains in the above illustration be solved? Below is the answer:
Ben Ama Nigeria Limited computation of CGT
- First Disposal
Proceeds from disposal = N150,000,000.00
Cost of acquisition = N100,000,000.00
Capital gain = N50,000,000.00
The N50 million gain will not be charged to CGT since it was fully reinvested to purchase shares in Carseal Airline Nigeria Limited
2. Sales Proceeds = N140,000,000.00
Less: carrying cost:
Cost of acquisition fewer capital gains rolled over = N150,000,000.00 – N50,000,000.00
= N100,000,000.00
Capital Gains = N140,000,000 – N100,000,000
= N40,000,000.00
Capital Gains Tax at CGT @ 10% = N4,000,000.00.
Now, let’s consider how to calculate CGT on the disposal of assets in Nigeria. According to Section 6 of the Capital Gains Tax Act (CGTA), the disposal of assets by a person, whereby any capital sum is derived from a sale, lease, transfer, assignment, compulsory acquisition or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum, and in particular:
- where a capital sum is derived by way of compensation for loss of office or employment;
- where any capital sum is received under a policy of insurance and the risk of any kind of damage or injury to, or the loss or depreciation of assets;
- where any capital sum is received in return for forfeiture or surrender of rights, or from refraining from exercising rights;
- Where any capital sum is received as consideration for use of exploitation of any asset; and
- where a capital sum is received in connection with it or arises by virtue of any trade, business, profession, or vocation.
To compute capital gains on the disposal of assets, as mentioned above, the following steps should be adhered to:
- Identification of sales proceeds from the disposal of the asset
- Deduction of allowable expenses from the Sale proceeds to derive at the Net Sales proceeds
- Deduction of the cost of acquiring the asset originally from the Net Sales proceeds to arrive at Capital Gains
- Multiplying Capital Gains by the flat rate of 10% to the CGT
Let’s use an illustration to explain this better. Abiola Tajudeen sold a real estate property he acquired for N45 million after initially paying N17 million to get it. He spent N300,000 on advertisement fees and paid an accountant N200,000 in professional fees. How can CGT be calculated in the illustration above? Follow below:
Proceeds from Disposal of asset= N45,000,000.00
Less allowable expenses:
N45,000,000 – (N300,000 + N200,000)
= N45,000,000 – N500,000
= N44,500,000
Less cost of acquisition:
N44,500,000 – N17,000,000 = N27,500,000
Capital Gains = N27,500,000.00
Capital gains @ 10% = N2,750,0000
-
How to File CGT Returns in Nigeria
According to Section 2(4) of the Capital Gains Act (as amended), every person, having disposed of a chargeable asset is expected to compute CGT, pay the tax computed and file an assessment as prescribed by the Federal Inland Revenue Service, in respect to chargeable assets disposed within the respective periods.
Below are the details a taxpayer should include to show details of the assets they disposed of:
- The name and description of each asset disposed of;
- disposal proceeds;
- expenses incidental to disposal;
- cost of acquisition, including costs incidental to acquisition;
- date of acquisition; and
- date of disposal
In the case of the disposal of shares, the following details must be included:
- the name of the shares;
- quantity of shares disposed of;
- disposal proceeds (of each batch disposed and in aggregate);
- cost of acquisition (of each batch purchased and in aggregate);
- date of acquisition;
- date of disposal
The due dates for filing returns are as follows:
- In respect to chargeable assets disposed from 1st December in a year to 31st May the immediately following year, not later than 30th June; and
- in respect of chargeable assets disposed from 1st June tob30th November each year, not later than 31st December
When filing tax returns for CGT, the following should be with you at all times:
- Duly filed CGT Self-Assessment Form;
- Computation of CGT;
- Schedule showing detail of individual
- Evidence of payment of Capital Gains Tax
It should be noted that partial disposal of chargeable assets is also subject to CGT. That being said, we believe this article has helped explain how to calculate Capital Gains Tax in Nigeria.