CGT: Untapped revenue goldmine

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:
•That person is the indi­vidual’s spouse.
•A trustee of a settlement with any individual who in relation of the settlement is a settler.
•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:
•The same person has control of both or he and persons connected with him has control of the other.
•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.
•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.
•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:
•The amount or value of the consideration (in money or money’s worth) given wholly, exclusively and nec­essarily incurred in providing the asset.
•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.
•Expenses wholly, exclusively and necessar­ily incurred on the asset in establishing, preserving or defending the title or right over the asset.
•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.