- 15 Marks
Question
Kanadu Nigeria Limited is a manufacturer of leather shoes, bags, and allied accessories since 2017. The recent changes in the taste of customers, particularly the quest for imported, cheaper leather shoes and bags, have had a negative impact on the company’s profits. The management has decided to re-organize the business in a way to better satisfy the customers.
The following transactions were extracted from the books of the company:
(i) June 2017: Acquisition of an acre of land at the outskirts of the State capital for N8,500,000. The company spent an additional amount of N1,500,000 to sand-fill the land;
(ii) August 2017: A factory was built on the acquired land for the purpose of the business at a cost of N65,000,000;
(iii) May 2022: Sold part of the factory’s land for N25,500,000;
(iv) The market value of the remaining property unsold, as valued by a professional valuer, at the time of disposal in May 2022, was N99,500,000;
(v) July 2023: Acquisition of a new acre of land in the town for N45,000,000 (utilized all the proceeds from the disposal of the land). This is expected to be used for the construction of another factory in the same line of business.
The company’s General Manager, who is an engineer, has just engaged your professional accounting firm as its tax consultants.
Required:
As the Principal Partner, you are to prepare a report to the General Manager, stating the:
a. Capital gains tax payable in line with the provisions of Capital Gains Tax Cap C1 LFN 2004 (as amended) (10 Marks)
b. New cost of undisposed property (2 Marks)
c. The roll-over relief (if any) the company is entitled to (2 Marks)
d. Due date(s) for the payment of tax liabilities (1 Mark)
(Total 15 Marks)
Answer
a. Capital gains tax payable
As shown in the attached appendix, the company realized a chargeable gain of N10,200,000 on the disposal of part of its land. Based on the provisions of Capital Gains Tax Cap C1 LFN 2004 (as amended), the company is liable to pay tax at the rate of 10%, resulting in a tax liability of N1,020,000. This tax should be paid to the Federal Inland Revenue Service integrated office in Kaduna.
b. New cost of undisposed property
The new cost of the remaining property is derived by subtracting the cost of the part disposed from the total cost of the property. The calculation is as follows:
- Total Cost of Property: N75,000,000
- Cost of Part Disposed: N15,300,000
- New Cost of Undisposed Property: N75,000,000 – N15,300,000 = N59,700,000
c. Roll-over relief
The company utilized the entire proceeds from the land disposal (N25,500,000) to acquire another piece of land in the State capital for business purposes. However, the re-acquisition occurred more than 12 months after the original disposal (May 2022 – July 2023). According to the Capital Gains Tax Act 2004 (as amended), to qualify for roll-over relief, re-acquisition of a new asset must occur within 12 months of the disposal. Consequently, the company does not qualify for roll-over relief.
d. Due date(s) for payment of tax liabilities
The land was disposed of in May 2022, and in line with the provisions of Section 2, Finance Act 2020, the capital gains tax payment is due by June 30, 2022.
- Topic: Capital Gains Tax (CGT)
- Series: MAY 2024
- Uploader: Dotse