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- 4 Marks
ATAX – May 2017 – L3 – Q3b – Capital Gains Tax (CGT)
List allowable deductions under the Capital Gains Tax Act for chargeable gains computations.
Question
Capital Gains Tax is imposed on gains arising from the ownership of a capital asset changing hands, either by exchange, transfer, sale, or gift.
The tax is chargeable on the total amount of the chargeable gains arising after deducting allowable expenses on the disposal of chargeable assets in any year of assessment.
Required:
State the allowable deductions under the Capital Gains Tax Act CAP C1 LFN 2004 as amended. (4 Marks)
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- Tags: Allowable Deductions, Asset Disposal, Capital gains tax
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 16 Marks
ATAX – May 2017 – L3 – Q3a – Capital Gains Tax (CGT)
Compute Capital Gains Tax for hire purchase transactions and explain the implications of hire purchase interest on CGT.
Question
Global Company Nigeria Limited, a construction company based in Abuja, commenced business on January 7, 2009. The company has struggled to acquire necessary equipment due to poor financial results.
At a directors’ meeting on November 6, 2012, the company decided to approach a finance house for assistance. They provided the following information:
- The company purchased an excavator on hire purchase on March 1, 2013, and paid a deposit of N32,000,000.
- The excavator’s cost price was N55,000,000, with the balance payable in 25 monthly installments of N1,200,000 starting April 1, 2013.
The excavator was sold as follows:
- For N65,000,000 after installment payments on January 1, 2014.
- For N69,000,000 after installment payments on November 1, 2014.
You are required to:
i. Calculate the Capital Gains Tax (CGT) for the relevant Assessment Year, assuming the sales values above. (14 Marks)
ii. Explain the implications of hire purchase interest on Capital Gains Tax computations. (2 Marks)
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- Tags: Assessment Year, Capital gains tax, Hire Purchase, Tax computation
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 30 Marks
ATAX – May 2017 – L3 – Q1 – Overview of Advanced Taxation
Explain tax concepts and calculate Companies Income Tax due for Rex Pharmaceuticals.
Question
You are the Tax Controller of Rex Pharmaceuticals (Nigeria) Limited having its Head Office in Ketu, Epe Local Government of Lagos State.
In the past three years, the company had been subjected to taxes by different Revenue Authorities within Lagos State and indeed, the entire country.
Apart from the Companies Income Tax, the issue of Withholding Tax is an area where the company’s management is very much concerned. The Managing Director is worried that this multiplicity of taxes is taking its toll on the company’s financials.
The company is already facing myriads of problems ranging from outrageous cost of capital which had led to increase in cost of production and attendant decrease in profit. The company’s goods are becoming uncompetitive, compared to imported goods. The long-term effect is either reduction in workforce or relocation to a more favorable economic climate.
The Managing Director summoned you to his office and among the issues raised at the meeting were:
(i) as a corporate body, the company ought not to be subjected to multiplicity of taxes beyond the Companies Income Tax;
(ii) the jurisdiction of the tiers of Government in imposition and collection of taxes;
(iii) the Withholding Tax;
(iv) the Pay As You Earn as it affects the staff; and
(v) the Capital Gains Tax.
You have also been informed of the following:
- The company’s technical agreement with the foreign Head Office and the need to remit funds;
- The Non-Executive Directors;
- The Non-Resident directors are to receive N2,500,000;
- Centralization of staff PAYE deductions;
- Dividend payment to shareholders in different parts of the country. Those resident in Kogi are to receive N375,000;
- Land for a factory in Abuja purchased from Alhaji Garuba Maito who resides in Kano;
- Rex Pharmaceuticals received N4,500,000 as Net dividend from an associated company Laiketop Limited for the year ended September 30, 2014. In the Audited Financial Statements of Rex Pharmaceuticals for the year ended December 31, 2015, a dividend of N9,500,000 was proposed. Out of this amount, N3,500,000 was from dividend received from Laiketop Limited while the balance was from a Total Profit of N22,500,000 from other trading activities;
- At present, out of the thirty employees in Abuja, five are resident in Suleja, Niger State.
Required:
(a) Explain briefly the following:
i. Capital Gains Tax
ii. Withholding Tax
iii. Double Taxation Treaty
iv. Multiple Taxation (12 Marks)
(b) Discuss measures put in place by the government to reduce cases of multiple taxation. (6 Marks)
(c) State the arms of government empowered by the Constitution to legislate on tax matters. (6 Marks)
(d) Determine the Companies Income Tax due from Rex Pharmaceuticals Limited for the year ended December 31, 2015. (6 Marks)
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- 18 Marks
ATAX – May 2019 – L3 – Q4b – Capital Gains Tax (CGT)
Advise on capital gains arising from various business transactions, deemed disposal, and roll-over relief for Smaposu Nigeria Limited.
Question
Smaposu Nigeria Limited is based in Ibadan, Oyo State, and is involved in the manufacturing of computer accessories. The company undertook the following transactions during the year ended December 31, 2018:
(i) Plant and machinery: Part of the plant and machinery was purchased in the year 2014 at an all-inclusive price of ₦12,500,000. A machinery was sold for ₦8,100,000, and the value of the undisposed part was ₦5,740,000. Selling expenses incurred amounted to ₦150,000.
(ii) Motor vehicle: A motor vehicle, which was acquired in 2016 for ₦3,000,000 for the purpose of the business, was sold to the company’s general manager for ₦2,900,000. The market value of the car as at the point of disposal was ₦3,500,000. The company re-acquired a similar car for ₦3,500,000.
(iii) As a result of an unfavorable business climate in Ibadan, the company relocated to Ikeja, Lagos State. The land and buildings acquired in Ibadan in 2009 for ₦30,000,000 were sold for ₦65,500,000. The cost of valuation and professional fees incurred on disposal was ₦2,000,000. A reinvestment was made in Ikeja through the acquisition of another landed property valued at ₦50,000,000.
Smaposu Nigeria Limited has just appointed your firm as the company’s tax consultant.
You are required to advise the management on:
i. “Deemed” disposal of an asset. (5 Marks)
ii. The capital gains (if any) arising from these transactions. (6 Marks)
iii. The roll-over relief (if any) on re-investment made on the acquisition of new assets by the company. (4 Marks)
iv. Capital gains tax payable. (3 Marks)
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- Tags: Asset Disposal, Business Relocation, Capital gains tax, Deemed Disposal, Roll-Over Relief
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 2 Marks
ATAX – May 2019 – L3 – Q4a – Capital Gains Tax (CGT)
Define when acquisition or disposal is effective under the Capital Gains Tax Act.
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- Tags: Acquisition, Capital gains tax, CGT, Disposal, Tax law
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 15 Marks
AT – Nov 2014 – L3 – SC – Q7 – Capital Gains Tax (CGT)
Compute total income for 2011 tax assessment and capital gains tax for relevant year.
Question
Mr. James Zonto lived in Canada for thirty years and decided to settle down permanently in Nigeria with effect from January 2007.
Based on advice from his secondary school classmate, Mr. James Zonto repatriated a huge amount of money to Nigeria. He took advantage of the better investment climate in Nigeria and acquired the following properties:
- Uyo Duplex: Bought on 2 March 2008 for N25,320,000. Rental income: N855,000 per annum (net of withholding tax).
- Fixed Deposit Account: Invested N14,000,000 on 4 January 2008 with Doronine Bank Plc, yielding interest (net of withholding tax) of N180,000 per month.
- Onitsha Property: Acquired on 6 October 2008 for N31,500,000 with incidental expenses of N2,400,000. Annual rent: N1,800,000.
- Okija House: Bought for N10,000,000 as a personal residence; not rented out.
In 2012, he decided to resettle in Toronto and took the following actions:
- Uyo House: Sold for N47,450,000 after incurring the following expenses:
- Advertising: N650,000
- Valuation fees: N2,000,000
- Estate Agent’s Commission: N2,372,500
- Legal fees: N1,500,000
- Fixed Deposit: Matured on 31 December 2011; not rolled over.
- Onitsha Property: Sold one of the four duplexes for N14,175,000. Remaining duplexes valued at N40,500,000.
- Okija House: Sold for N36,500,000 after incurring incidental expenses of N3,650,000.
Required:
(a) Compute the Total Income for Income Tax purposes for 2011 year of assessment.
(b) Compute the Capital Gains Tax payable for the relevant year of assessment.
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- 20 Marks
ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)
Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.
Question
Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of the Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of the Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed of is to be made.
Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano, and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions:
(i) Disposal of an option
On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of ₦8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for ₦32,200,000.
(ii) Acquisition of asset in exchange for debt
On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at ₦15,000,000, for the debt of ₦13,500,000. The company, on May 7, 2021, disposed of the land for ₦18,000,000. Incidental expenses incurred towards the disposal of the land were ₦250,000.
(iii) Disposal of a building
The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for ₦110,000,000. The cost of acquisition of the five buildings in the estate was ₦250,000,000. The cost of acquisition of the building sold was ₦75,000,000, while the remaining buildings unsold were professionally valued at ₦240,000,000. The company also incurred for the purpose of the disposal of the building, ₦400,000 on building repairs and a professional valuer’s fee of ₦1,100,000.
(iv) Disposal of industrial plants
One of the company’s industrial plants in the Kano branch, which cost ₦4,500,000, was disposed of on September 15, 2021, for ₦6,000,000. A new plant was bought for the purpose of the company’s operations the following month for ₦8,000,000. During the installation of the new plant, it was found that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021, as “second-hand” for ₦7,300,000. The company incurred the sum of ₦25,000 as disposal expenses.
The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical,” which only competent professional accountants with experience in tax matters can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.
Required:
You have been directed by your firm’s Head (Tax Matters) to take charge of the assignment and submit a report to him by the close of work in three days.
Your report should specifically cover:
(a) The principles of disposal as provided for in Section 6 of the Capital Gains Tax Act 2004 (as amended) (3 Marks).
(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for the following stated transactions:
i. Disposal of an option in Ikeja branch (2 Marks).
ii. Acquisition of asset in exchange for debt in Calabar head office (3 Marks).
iii. Disposal of a building in Abuja branch (4 Marks).
iv. Disposal of industrial plants in Kano branch (8 Marks).
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- Tags: Capital gains tax, CGT Act, Compliance, Disposal of assets
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 15 Marks
ATAX – May 2023 – L3 – Q5 – Capital Gains Tax (CGT)
Analyze the tax implications of asset disposal and re-acquisition for Fashion Stitches Ltd.
Question
Fashion Stitches Limited, Lagos, is a private limited liability company specializing in sewing and sales of clothes and allied materials for medium and upper-class clients in highbrow areas of the country.
The company has a core sewing staff, while other employees frequently travel to major cities such as Abuja, Kaduna, Ibadan, and Port Harcourt to receive orders from clients.
While reviewing their activities for the first quarter ended March 31, 2022, the Operating Officer noted that the recent increase in travel and staff costs, which had risen by over 150% compared to the corresponding period in 2021, negatively impacted the company’s financial performance.
Management decided to relocate the business to the Federal Capital Territory (FCT), Abuja, where over 75% of their clients reside. The move is planned for November 15, 2022, involving the disposal and re-acquisition of some assets required for the business.
The following transactions took place between April and October 2022:
- Property Disposal and Acquisition:
- The property (land and building) in Lagos, acquired in 2008 for N18,220,000, was sold for N65,100,000.
- Incidental costs of disposal included:
- Estate valuer’s fee: N1,627,500
- Renovation expenses: N1,800,000
- Advertisement cost: N250,000
- A new property was purchased in the FCT for N80,000,000.
- Disposal and Re-Acquisition of Sewing Machines and Equipment:
- Sewing machines and tailoring equipment, bought between 2015 and 2019 for N3,300,000, were disposed of for N2,800,000.
- New machines and equipment were acquired for N7,130,000.
- Disposal and Re-Acquisition of Generating Set:
- A 10 KVA generating set, which cost N1,500,000 in 2017, was disposed of for N1,900,000.
- Another generating set was acquired for N2,450,000.
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- Tags: Asset Re-Acquisition, Capital gains tax, Tax Reliefs
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 20 Marks
ATAX – Nov 2021 – L3 – Q4 – Capital Gains Tax (CGT)
Explanation of tax implications for transactions considered artificial involving connected persons.
Question
Colends Nigeria Limited, Abeokuta, is a manufacturer of plastic materials. The company is well known for prompt payment of taxes as at when due. The cordial relationship between the company and the Federal tax authorities is about to be breached as a result of disagreement in the classification of some transactions made by the company. The tax authorities considered those transactions to be artificial or fictitious, while the Managing Director, who is not an accountant, felt otherwise.
The company is in the process of re-organising its operations so as to compete favorably with its contemporaries, particularly with the implementation of the Africa Continental Free Trade Area Agreement (ACFTA) by some African countries.
The following transactions were concluded by the company during the financial year ended December 31, 2020:
- Land and building acquired for ₦70 million on March 6, 2015, were sold for ₦125 million. Advertisement cost was ₦500,000, while the estate agent received a 5% commission of the sale proceeds.
- Plant and machinery, which originally cost ₦28 million, were sold for ₦32 million to one of its subsidiaries, Colmas Limited. The market value of the assets sold was ₦40 million.
- A saloon motor vehicle acquired for ₦5 million in 2017 was sold to the General Manager of the company for ₦3.5 million. The market value of the car was put at ₦5.5 million.
- A giant generator that was acquired in 2018 for ₦12 million was disposed of for ₦15 million. The cost of disposal amounted to ₦200,000.
At a recent meeting of the board, the following transactions were approved and implemented in December 2020:
- Acquisition of a large acreage of land and a building in the outskirts of the city-center for the business at ₦100 million.
- Purchase of a modern plant and machinery for ₦50 million.
- A saloon motor vehicle was purchased for ₦10 million.
- A brand new generator costing ₦20 million was acquired.
Colends Nigeria Limited has recently appointed you as its tax consultant.
Required:
Draft a report to the Managing Director of the company explaining:
a. The concept of connected persons and artificial transactions. (4 Marks)
b. The tax implications, if any, on transactions executed by the company in accordance with the provisions of the Capital Gains Tax Act Cap C1 LFN 2004 (as amended). (16 Marks)
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- 4 Marks
ATAX – May 2017 – L3 – Q3b – Capital Gains Tax (CGT)
List allowable deductions under the Capital Gains Tax Act for chargeable gains computations.
Question
Capital Gains Tax is imposed on gains arising from the ownership of a capital asset changing hands, either by exchange, transfer, sale, or gift.
The tax is chargeable on the total amount of the chargeable gains arising after deducting allowable expenses on the disposal of chargeable assets in any year of assessment.
Required:
State the allowable deductions under the Capital Gains Tax Act CAP C1 LFN 2004 as amended. (4 Marks)
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- Tags: Allowable Deductions, Asset Disposal, Capital gains tax
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 16 Marks
ATAX – May 2017 – L3 – Q3a – Capital Gains Tax (CGT)
Compute Capital Gains Tax for hire purchase transactions and explain the implications of hire purchase interest on CGT.
Question
Global Company Nigeria Limited, a construction company based in Abuja, commenced business on January 7, 2009. The company has struggled to acquire necessary equipment due to poor financial results.
At a directors’ meeting on November 6, 2012, the company decided to approach a finance house for assistance. They provided the following information:
- The company purchased an excavator on hire purchase on March 1, 2013, and paid a deposit of N32,000,000.
- The excavator’s cost price was N55,000,000, with the balance payable in 25 monthly installments of N1,200,000 starting April 1, 2013.
The excavator was sold as follows:
- For N65,000,000 after installment payments on January 1, 2014.
- For N69,000,000 after installment payments on November 1, 2014.
You are required to:
i. Calculate the Capital Gains Tax (CGT) for the relevant Assessment Year, assuming the sales values above. (14 Marks)
ii. Explain the implications of hire purchase interest on Capital Gains Tax computations. (2 Marks)
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- Tags: Assessment Year, Capital gains tax, Hire Purchase, Tax computation
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 30 Marks
ATAX – May 2017 – L3 – Q1 – Overview of Advanced Taxation
Explain tax concepts and calculate Companies Income Tax due for Rex Pharmaceuticals.
Question
You are the Tax Controller of Rex Pharmaceuticals (Nigeria) Limited having its Head Office in Ketu, Epe Local Government of Lagos State.
In the past three years, the company had been subjected to taxes by different Revenue Authorities within Lagos State and indeed, the entire country.
Apart from the Companies Income Tax, the issue of Withholding Tax is an area where the company’s management is very much concerned. The Managing Director is worried that this multiplicity of taxes is taking its toll on the company’s financials.
The company is already facing myriads of problems ranging from outrageous cost of capital which had led to increase in cost of production and attendant decrease in profit. The company’s goods are becoming uncompetitive, compared to imported goods. The long-term effect is either reduction in workforce or relocation to a more favorable economic climate.
The Managing Director summoned you to his office and among the issues raised at the meeting were:
(i) as a corporate body, the company ought not to be subjected to multiplicity of taxes beyond the Companies Income Tax;
(ii) the jurisdiction of the tiers of Government in imposition and collection of taxes;
(iii) the Withholding Tax;
(iv) the Pay As You Earn as it affects the staff; and
(v) the Capital Gains Tax.
You have also been informed of the following:
- The company’s technical agreement with the foreign Head Office and the need to remit funds;
- The Non-Executive Directors;
- The Non-Resident directors are to receive N2,500,000;
- Centralization of staff PAYE deductions;
- Dividend payment to shareholders in different parts of the country. Those resident in Kogi are to receive N375,000;
- Land for a factory in Abuja purchased from Alhaji Garuba Maito who resides in Kano;
- Rex Pharmaceuticals received N4,500,000 as Net dividend from an associated company Laiketop Limited for the year ended September 30, 2014. In the Audited Financial Statements of Rex Pharmaceuticals for the year ended December 31, 2015, a dividend of N9,500,000 was proposed. Out of this amount, N3,500,000 was from dividend received from Laiketop Limited while the balance was from a Total Profit of N22,500,000 from other trading activities;
- At present, out of the thirty employees in Abuja, five are resident in Suleja, Niger State.
Required:
(a) Explain briefly the following:
i. Capital Gains Tax
ii. Withholding Tax
iii. Double Taxation Treaty
iv. Multiple Taxation (12 Marks)
(b) Discuss measures put in place by the government to reduce cases of multiple taxation. (6 Marks)
(c) State the arms of government empowered by the Constitution to legislate on tax matters. (6 Marks)
(d) Determine the Companies Income Tax due from Rex Pharmaceuticals Limited for the year ended December 31, 2015. (6 Marks)
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- 18 Marks
ATAX – May 2019 – L3 – Q4b – Capital Gains Tax (CGT)
Advise on capital gains arising from various business transactions, deemed disposal, and roll-over relief for Smaposu Nigeria Limited.
Question
Smaposu Nigeria Limited is based in Ibadan, Oyo State, and is involved in the manufacturing of computer accessories. The company undertook the following transactions during the year ended December 31, 2018:
(i) Plant and machinery: Part of the plant and machinery was purchased in the year 2014 at an all-inclusive price of ₦12,500,000. A machinery was sold for ₦8,100,000, and the value of the undisposed part was ₦5,740,000. Selling expenses incurred amounted to ₦150,000.
(ii) Motor vehicle: A motor vehicle, which was acquired in 2016 for ₦3,000,000 for the purpose of the business, was sold to the company’s general manager for ₦2,900,000. The market value of the car as at the point of disposal was ₦3,500,000. The company re-acquired a similar car for ₦3,500,000.
(iii) As a result of an unfavorable business climate in Ibadan, the company relocated to Ikeja, Lagos State. The land and buildings acquired in Ibadan in 2009 for ₦30,000,000 were sold for ₦65,500,000. The cost of valuation and professional fees incurred on disposal was ₦2,000,000. A reinvestment was made in Ikeja through the acquisition of another landed property valued at ₦50,000,000.
Smaposu Nigeria Limited has just appointed your firm as the company’s tax consultant.
You are required to advise the management on:
i. “Deemed” disposal of an asset. (5 Marks)
ii. The capital gains (if any) arising from these transactions. (6 Marks)
iii. The roll-over relief (if any) on re-investment made on the acquisition of new assets by the company. (4 Marks)
iv. Capital gains tax payable. (3 Marks)
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- Tags: Asset Disposal, Business Relocation, Capital gains tax, Deemed Disposal, Roll-Over Relief
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 2 Marks
ATAX – May 2019 – L3 – Q4a – Capital Gains Tax (CGT)
Define when acquisition or disposal is effective under the Capital Gains Tax Act.
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- Tags: Acquisition, Capital gains tax, CGT, Disposal, Tax law
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 15 Marks
AT – Nov 2014 – L3 – SC – Q7 – Capital Gains Tax (CGT)
Compute total income for 2011 tax assessment and capital gains tax for relevant year.
Question
Mr. James Zonto lived in Canada for thirty years and decided to settle down permanently in Nigeria with effect from January 2007.
Based on advice from his secondary school classmate, Mr. James Zonto repatriated a huge amount of money to Nigeria. He took advantage of the better investment climate in Nigeria and acquired the following properties:
- Uyo Duplex: Bought on 2 March 2008 for N25,320,000. Rental income: N855,000 per annum (net of withholding tax).
- Fixed Deposit Account: Invested N14,000,000 on 4 January 2008 with Doronine Bank Plc, yielding interest (net of withholding tax) of N180,000 per month.
- Onitsha Property: Acquired on 6 October 2008 for N31,500,000 with incidental expenses of N2,400,000. Annual rent: N1,800,000.
- Okija House: Bought for N10,000,000 as a personal residence; not rented out.
In 2012, he decided to resettle in Toronto and took the following actions:
- Uyo House: Sold for N47,450,000 after incurring the following expenses:
- Advertising: N650,000
- Valuation fees: N2,000,000
- Estate Agent’s Commission: N2,372,500
- Legal fees: N1,500,000
- Fixed Deposit: Matured on 31 December 2011; not rolled over.
- Onitsha Property: Sold one of the four duplexes for N14,175,000. Remaining duplexes valued at N40,500,000.
- Okija House: Sold for N36,500,000 after incurring incidental expenses of N3,650,000.
Required:
(a) Compute the Total Income for Income Tax purposes for 2011 year of assessment.
(b) Compute the Capital Gains Tax payable for the relevant year of assessment.
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- 20 Marks
ATAX – May 2022 – L3 – Q3 – Capital Gains Tax (CGT)
Address the principles of disposal under CGT Act, and compute CGT for transactions in Ikeja, Calabar, Abuja, and Kano.
Question
Disposal of assets is an important concept in the determination of capital gains tax payable. Section 6 of the Capital Gains Tax Act 2004 (as amended) specifically provides that a disposal of assets by a person occurs where any capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital sum. In the same vein, Section 2 (4) of the Finance Act 2020 states the period for filing of self-assessment returns and when payment of the tax computed in respect of chargeable assets disposed of is to be made.
Nice-One Nigeria Limited, a manufacturing concern, with head office in Calabar and branches in Ikeja, Kano, and Abuja, has been in business for several years, reporting its accounts to December 31 of every year. The extracts from the books of accounts of the company during the year ended December 31, 2021, revealed the following transactions:
(i) Disposal of an option
On February 1, 2021, the company sold an option on a piece of land in Ikeja for the sum of ₦8,500,000 to Eco-Raheem Limited, which subsequently exercised the right by purchasing the land for ₦32,200,000.
(ii) Acquisition of asset in exchange for debt
On March 15, 2021, one of the company’s debtors in Calabar, Mr. Baba Tee, reached an agreement with the company by exchanging his piece of land, which was valued at ₦15,000,000, for the debt of ₦13,500,000. The company, on May 7, 2021, disposed of the land for ₦18,000,000. Incidental expenses incurred towards the disposal of the land were ₦250,000.
(iii) Disposal of a building
The company has a staff estate, which comprises five buildings in its Abuja branch. In order to source funds to construct a new staff estate in Kano, the company, on August 12, 2021, sold one of its buildings in the Abuja estate for ₦110,000,000. The cost of acquisition of the five buildings in the estate was ₦250,000,000. The cost of acquisition of the building sold was ₦75,000,000, while the remaining buildings unsold were professionally valued at ₦240,000,000. The company also incurred for the purpose of the disposal of the building, ₦400,000 on building repairs and a professional valuer’s fee of ₦1,100,000.
(iv) Disposal of industrial plants
One of the company’s industrial plants in the Kano branch, which cost ₦4,500,000, was disposed of on September 15, 2021, for ₦6,000,000. A new plant was bought for the purpose of the company’s operations the following month for ₦8,000,000. During the installation of the new plant, it was found that the plant could not efficiently satisfy the requirements of the company and it was subsequently sold on December 2, 2021, as “second-hand” for ₦7,300,000. The company incurred the sum of ₦25,000 as disposal expenses.
The Managing Director of the company is of the opinion that issues around the transactions undertaken by the company in the financial year are “technical,” which only competent professional accountants with experience in tax matters can conveniently handle. Accordingly, your firm of accountants was contacted to help provide tax advice on each of the above transactions.
Required:
You have been directed by your firm’s Head (Tax Matters) to take charge of the assignment and submit a report to him by the close of work in three days.
Your report should specifically cover:
(a) The principles of disposal as provided for in Section 6 of the Capital Gains Tax Act 2004 (as amended) (3 Marks).
(b) Computation of capital gains tax payable and when the tax due is to be paid to the relevant tax authority for the following stated transactions:
i. Disposal of an option in Ikeja branch (2 Marks).
ii. Acquisition of asset in exchange for debt in Calabar head office (3 Marks).
iii. Disposal of a building in Abuja branch (4 Marks).
iv. Disposal of industrial plants in Kano branch (8 Marks).
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- Tags: Capital gains tax, CGT Act, Compliance, Disposal of assets
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 15 Marks
ATAX – May 2023 – L3 – Q5 – Capital Gains Tax (CGT)
Analyze the tax implications of asset disposal and re-acquisition for Fashion Stitches Ltd.
Question
Fashion Stitches Limited, Lagos, is a private limited liability company specializing in sewing and sales of clothes and allied materials for medium and upper-class clients in highbrow areas of the country.
The company has a core sewing staff, while other employees frequently travel to major cities such as Abuja, Kaduna, Ibadan, and Port Harcourt to receive orders from clients.
While reviewing their activities for the first quarter ended March 31, 2022, the Operating Officer noted that the recent increase in travel and staff costs, which had risen by over 150% compared to the corresponding period in 2021, negatively impacted the company’s financial performance.
Management decided to relocate the business to the Federal Capital Territory (FCT), Abuja, where over 75% of their clients reside. The move is planned for November 15, 2022, involving the disposal and re-acquisition of some assets required for the business.
The following transactions took place between April and October 2022:
- Property Disposal and Acquisition:
- The property (land and building) in Lagos, acquired in 2008 for N18,220,000, was sold for N65,100,000.
- Incidental costs of disposal included:
- Estate valuer’s fee: N1,627,500
- Renovation expenses: N1,800,000
- Advertisement cost: N250,000
- A new property was purchased in the FCT for N80,000,000.
- Disposal and Re-Acquisition of Sewing Machines and Equipment:
- Sewing machines and tailoring equipment, bought between 2015 and 2019 for N3,300,000, were disposed of for N2,800,000.
- New machines and equipment were acquired for N7,130,000.
- Disposal and Re-Acquisition of Generating Set:
- A 10 KVA generating set, which cost N1,500,000 in 2017, was disposed of for N1,900,000.
- Another generating set was acquired for N2,450,000.
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- Tags: Asset Re-Acquisition, Capital gains tax, Tax Reliefs
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
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- 20 Marks
ATAX – Nov 2021 – L3 – Q4 – Capital Gains Tax (CGT)
Explanation of tax implications for transactions considered artificial involving connected persons.
Question
Colends Nigeria Limited, Abeokuta, is a manufacturer of plastic materials. The company is well known for prompt payment of taxes as at when due. The cordial relationship between the company and the Federal tax authorities is about to be breached as a result of disagreement in the classification of some transactions made by the company. The tax authorities considered those transactions to be artificial or fictitious, while the Managing Director, who is not an accountant, felt otherwise.
The company is in the process of re-organising its operations so as to compete favorably with its contemporaries, particularly with the implementation of the Africa Continental Free Trade Area Agreement (ACFTA) by some African countries.
The following transactions were concluded by the company during the financial year ended December 31, 2020:
- Land and building acquired for ₦70 million on March 6, 2015, were sold for ₦125 million. Advertisement cost was ₦500,000, while the estate agent received a 5% commission of the sale proceeds.
- Plant and machinery, which originally cost ₦28 million, were sold for ₦32 million to one of its subsidiaries, Colmas Limited. The market value of the assets sold was ₦40 million.
- A saloon motor vehicle acquired for ₦5 million in 2017 was sold to the General Manager of the company for ₦3.5 million. The market value of the car was put at ₦5.5 million.
- A giant generator that was acquired in 2018 for ₦12 million was disposed of for ₦15 million. The cost of disposal amounted to ₦200,000.
At a recent meeting of the board, the following transactions were approved and implemented in December 2020:
- Acquisition of a large acreage of land and a building in the outskirts of the city-center for the business at ₦100 million.
- Purchase of a modern plant and machinery for ₦50 million.
- A saloon motor vehicle was purchased for ₦10 million.
- A brand new generator costing ₦20 million was acquired.
Colends Nigeria Limited has recently appointed you as its tax consultant.
Required:
Draft a report to the Managing Director of the company explaining:
a. The concept of connected persons and artificial transactions. (4 Marks)
b. The tax implications, if any, on transactions executed by the company in accordance with the provisions of the Capital Gains Tax Act Cap C1 LFN 2004 (as amended). (16 Marks)
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