- 20 Marks
Question
since 2015. It has been a leading name in the production of a popular brand of household vegetable oil known as “Abop,” which is in high demand.
Given the fact that the company is doing very well, it secured funds from its bankers and bought additional Plant and Machinery in excess of its immediate needs on June 1, 2013, for ₦24,600,000.
The Finance Director convinced the Board to dispose of part of the plant and machinery to boost the company’s working capital. Consequently, on December 31, 2015, the company sold part of the Plant and Machinery for ₦37,925,000 and spent ₦5,125,000 as expenses incidental to the sale. The market value of the remaining Plant and Machinery was ₦15,375,000 as of December 31, 2015.
However, the issue of the tax implications of these transactions is worrisome to the Managing Director, who is visibly disturbed that the Federal Inland Revenue Service (FIRS) might come after the company.
You are required to:
a. State any FOUR Chargeable Assets. (2 Marks)
b. State any FOUR conditions for granting Roll-Over Relief. (8 Marks)
c. Compute the Chargeable Gains on the asset sold. (4 Marks)
d. Compute the Capital Gains Tax. (2 Marks)
e. Compute the new cost of the remaining asset. (4 Marks)
Answer
a. Four Chargeable Assets:
- Land and buildings.
- Plant and machinery not used for the purpose of the trade.
- Shares and securities.
- Goodwill and other intangible assets.
b. Four Conditions for Granting Roll-Over Relief:
- The asset disposed of must be used for the purpose of trade or business.
- The proceeds from the disposal must be reinvested in acquiring new qualifying assets.
- The reinvestment must occur within 12 months before or after the disposal.
- The claim for roll-over relief must be made to the tax authorities within the stipulated time frame.
c. Computation of Chargeable Gains on the Asset Sold:
| Details | Amount (₦) |
|---|---|
| Proceeds from Sale | 37,925,000 |
| Less: Expenses Incidental to Sale | (5,125,000) |
| Net Proceeds | 32,800,000 |
| Less: Original Cost of Asset Sold | (24,600,000) |
| Chargeable Gains | 8,200,000 |
d. Computation of Capital Gains Tax:
| Details | Amount (₦) |
|---|---|
| Chargeable Gains | 8,200,000 |
| Capital Gains Tax Rate (10%) | 0.10 |
| Capital Gains Tax | 820,000 |
e. Computation of the New Cost of Remaining Asset:
| Details | Amount (₦) |
|---|---|
| Total Cost of Plant and Machinery | 24,600,000 |
| Less: Cost of Asset Sold | (15,375,000) |
| New Cost of Remaining Asset | 9,225,000 |
Explanation of Significance:
- Chargeable Gains: Reflect the profit made from the disposal of the asset after deducting related costs.
- Capital Gains Tax: Represents the tax liability on the profit earned from the sale.
- New Cost of Remaining Asset: Establishes the adjusted value of the unsold assets for future accounting and tax purposes.
- Tags: Capital Gains, Chargeable assets, Roll-Over Relief, Tax implications
- Level: Level 3
- Topic: Capital Gains Tax (CGT)
- Series: NOV 2016
- Uploader: Dotse