Nigeria: Rationale For Payment Of Capital Gains Tax On Development On Land, A Case Study Of Improvements On Land Subject To A Development Lease At The Federal Capital Territory, Abuja

In Nigeria's Federal Capital Territory ("the FCT"), the Land Use Act empowers the Minister of the FCT ("the Head lessor") to grant persons ("the Lessee") development lease over portion of lands for a period of years for the purpose of development. This is in line with the Federal Capital Territory Administration ("FCDA")'s mission to develop the FCT under the Public Private Partnership Policy. Under this policy, title to the land allocated to a Lessee revokes back to the Head lessor at the end of the agreed period of the lease. It is therefore the responsibility of the Lessee to develop the portion of land allocated to it and sell the developments to purchasers to recoup the funds used in developing the land plus profit within the agreed period.

Capital Gains Tax ("CGT") is a tax chargeable at the rate of 10% on the capital gains arising from the disposal of capital assets. Capital gains mainly represent the excess of disposal proceeds realized over the cost of the particular asset. Generally, the production of evidence of payment of CGT is a condition for effecting change in ownership of landed property. Hence, the pertinent question is, is the purchase price for sale of developments on a leased land a "capital gain" upon the land within the meaning of the Capital Gains Act, ("the Act") for the purpose of payment of CGT charges? Does the Act exempt developments on a leased land from payment of CGT charges? Would purchasers of the development being the original beneficial owners be liable to pay CGT charges? Logical answers to these questions will shed light on the subject matter.

Is the purchase price for sale of developments on a leased land a "capital gain" upon the land within the meaning of the Act for payment of CGT charges?

"Capital gain" means "an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price" . It is also defined as "the amount by which an asset's selling price exceeds its initial purchase price"

Section 1 (1) of the Act in defining "taxation of capital gains" provides that;
"Subject to the provisions of this Act, there shall be charged a tax to be called capital gains tax for the year of assessment 1967-1968 and for subsequent years, assessment in respect of any capital gains, that is to say, gains accruing to any person on or after 1st April 1967 on a disposal of an asset"

"Capital gain" presupposes that an asset is sold at a price higher than the initial purchase price it was bought. The provisions of all Development Lease in the FCT indicate that the Lessee is a mere developer of the leased land for the Head lessor. The Lessee sells the development to purchasers for profit and nominates them for issuance of certificate of occupancy by the Head lessor. This is similar to direct allocation of land by the Head lessor to the purchasers. In the circumstance, the Lessee did not purchase the developments from the Head lessor to resell it to the purchasers at a higher value.

In the same vein, the "capital gain" in this case does not accrue to the lessee but to the Head Lessor. This is because upon the expiration of the agreed leased period, the title to the leased land reverts to the Head lessor whether the Lessee completes development of the land or not. The purchase price charged by the Lessee is simply a medium for it to recoup the sums used in developing the land on behalf of the Head lessor. The Lessee did not in fact pay any "initial purchase price" on the land. Hence, neither the development of the leased land nor the purchase of the development by the purchaser fit into the meaning of "capital gain" for the purposes of CGT charges. It is only when a purchaser resells the development to a subsequent purchaser that capital gain would accrue.

Does the Act exempt developments on a leased land from payment of CGT charges?

In order to encourage enterprises in some sectors, the Act exempts some assets from payment of CGT. The import of this is that; not ALL disposable assets are liable to the charge of CGT. Section 27 of the Act provides that;

"(1) there shall be exempt from capital gains tax any gains accruing to any local government council.
(2) Gains accruing to any of the bodies mentioned in this subsection shall be exempt from capital gains tax, that is to say-

(a) gains accruing to any company, being a purchasing authority established by or under any law in Nigeria, empowered to acquire any commodity in Nigeria for export from Nigeria; or
(b) gains accruing to any corporation established by or under any law for the purpose of fostering the economic development of any part of Nigeria in so far as the gains are not derived from the disposal of any assets acquired by the corporation in connection with any trade or business carried on by it or from the disposal of any share or other interest possessed by the corporation in a trade or business carried on by some other person or authority" (emphasis supplied)

FCDA is a corporation established by law and the "capital gain" on development on a leased land accrues to it. The improvement on the residential units is for the purpose of "fostering the economic development" of the FCT, as such the law imposes an obligation on FCDA to exempt the original purchasers of the development on a leased land from payment of CGT charges.

Would the purchasers of developments on a leased land being the original beneficial owners be liable to pay CGT charges?

The whole concept of payment of CGT charges is that an asset is sold at a price higher than its purchase price. This manifests in a scenario where a beneficial owner of a property transfers or assigns his/her interest in a property to another person as envisaged in Section 22 of the Land Use Act thus;

"It shall not be lawful for the holder of a statutory right of occupancy granted by the Governor to alienate his right of occupancy or any part thereof by assignment, mortgage, transfer of possession, sublease or otherwise however without the consent of the Governor first had and obtain"
Evidence of payment of CGT charges is one of the documents for application for Governor's consent upon an assignment, mortgage, transfer of possession, or sublease. Payment of CGT is not applicable to purchasers of developments on a leased land because apart from the fact that the Lessee does not possess statutory right of occupancy over the land, the transfer of proprietary and possessory interest in the land is done by the Head lessor. It is the Head Lessor who allocates title directly to the purchasers. Therefore payment of CGT charges is not a legal requirement in this instance because there is no need for Governor's (or as in this case Minister's) consent for the allocation.

In conclusion, it can be said that legally speaking, developments on a leased land is not a "capital gain" because it is the first dealing in the asset and there is no "initial purchase price" for the asset disposed. The development on the leased land is exempted from CGT charges because such gain on the leased plots is for the purpose of fostering the economic development of the FCT as such the purchasers as original beneficial owners of the developments are not liable to payment to CGT charges to FCDA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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