It is a fact that different tax laws apply to income earned by different categories of taxpayers in Nigeria. Hence, Companies Income Tax Act imposes tax on the profits of Companies other than those engaged in petroleum exploration and production; Personal Income Tax Act imposes tax on the income of individuals, families and communities;and Petroleum Profits Tax Act and Deep Offshore And Inland Basin Production Sharing Contracts Act impose tax on the profits of companies engaged in Petroleum activities.
The Capital Gains Tax Act Cap C1, LFN 2007 (CGTA or the Act) imposes tax on gains accruing to any taxpayer on disposal of assets. It taxes such gains at the rate of 10%.
Capital Gains Tax (CGT) is imposed on gains accruing to any taxpayer on disposal of assets. Capital gains are those gains that arise from an increase in the value of capital assets, that is, assets that were not purchased with the prime intention of immediate resale or exchange. When these gains are realized by sale, exchange or disposal of the asset for net amounts, which are more than the historical cost of the asset, CGT is triggered.
The Act refers to assets on which CGT is to be imposed as 'chargeable assets' and these include; options, debts, incorporeal property, currencies other than Naira, any form of property e.g. copyrights, buildings, chattels etc. Such assets are usually bought for use and are therefore not regularly offered for sale. On sale or disposal of such assets, an appreciation in its value becomes a realized capital gain. Capital gains tax is levied on an actual year basis and is calculated as the difference between the historical cost of acquisition of the asset and the net proceeds from the sale thereof. "Net sale proceeds" is the actual amount paid by the buyer less any cost incurred by the seller in order to make the sale a reality.
Section 32 (1) of the CGTA entitles a taxpayer to defer the CGT payable where it disposes of/exchanges certain business assets (i.e. assets used for the purpose of a trade or business) and replaces them with another asset of similar class for the purpose of the same business. This concept is known as 'roll-over relief'.
There are four classes of assets that qualify for roll-over relief stipulated by the CGTA as follows:
- Class 1 – Land and building (subject to certain exceptions) and Plant or Machinery
- Class 2 – Ship
- Class 3 – Aircraft
- Class 4 – Goodwill
The deferral could be on the entire gains or a portion of the gains. The conditions for granting the roll-over relief are as follows:
(a) if the asset disposed of was, until its sale, used for the purpose of the trade throughout the period of ownership;
(b) on acquisition, the new asset are used solely for the purposes of carrying out the trade as is the case with the old asset
c) acquisition of the new assets (or an unconditional contract for the acquisition of same) was done within twelve months before or twelve months after the disposal of the old asset. Where the old assets are disposed of in such circumstances that insurance proceeds are obtained and reinvested, the timeline for reinvestment in order to qualify for the relief is three years
(d) the old and new assets belong to the same class of assets
In practice, taxpayers are also required to formally notify the relevant Revenue Authority of its entitlement and claim of the relief. Considering the cash flow benefits involved, taxpayers typically show deep interest in 'roll-over relief'. Reinvestment can be in two forms namely: full and partial roll-over.
Where the taxpayer decides to reinvest the entire consideration derived from the sale of an old asset in the acquisition of new assets, it would be entitled to a full roll-over relief, if the above conditions are met. As such, there is a deferral of the CGT payable on the present transaction to a future period. The CGT would crystallize eventually where the new asset purchased is eventually disposed of without being replaced by any other asset. The chargeable gains will be determined by deducting the historical cost of the old asset from the new sales proceeds.
However, where only a portion of the consideration derived from the sale of the old asset is reinvested, the applicability of roll-over relief would depend on the amount of the consideration being reinvested (partial roll-over relief). In all instances, for the roll over relief to be applicable, the conditions set out in 'a' to 'd' above must be present." CGT may also be deferred indefinitely. For instance, where a new asset (which was itself a replacement for an old one) is disposed of and the sales proceeds are again applied to replace the new assets, the full capital gains tax will be further deferred. The implication of this is that for a going concern, which only disposes of its business assets because they are old/obsolete and need to be replaced, capital gains tax on such assets will be deferred indefinitely. This is one of the very bold incentives for continuous investments in Nigeria and investors need to be aware of it in order to maximize the benefits therein.
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.