Question
Microfin Garment Nigeria Plc has been in business for many years as manufacturers of textiles. At the recently held annual general meeting, some of the shareholders observed the downward trend in the profitability, market share price, dividends declared and paid to owners of the business. It was also noted that a particular product line of the company, perhaps due to stiff competition from local and foreign competitors, was not doing well in the market. A complete reorganisation of the company was the resolution proposed and accepted by majority of members of the company who attended the annual general meeting. The exercise was to be completed within quarter 3 of the new financial year.
The Board of Directors, in complying with the resolution reached at the annual general meeting, met last month and took the following decisions:
(i) The General Manager (Mr. Chukwu Bala) and Operations Manager (Mr. Ojo Ekaite)
of the “problematic” segment that was not contributing to the overall
profitability of the company was to be relieved of their jobs.
(ii) The relieved staff were to be paid compensation for loss of office. Mr. Bala and Mr. Ekaite would receive N12 million and N7.5 million, respectively.
(iii) All the relevant production and administrative staff are to be redeployed to other branches of the company; and
(iv) Details of qualifying property, plant and equipment disposed are as follows:
Industrial building Plant and machinery Factory equipment
N‟000 Cost 85,000 128,500 150,600 Tax written down value 36,125 16,062.5 37,650 Sales proceeds (see note bullet 2)
123,900 80,000 60,000
160,000
Notes:
Industrial building was acquired in 2014. Towards the disposal of the asset in February 2021, the company spent N288,000 for renovation; and incidental cost of N150,000. The sum of N100,200,000 out of N123,900,000 realised from the disposal of the industrial building was used in July 2021 to acquire another building at the head office.
Plant and machinery were acquired in 2017. Part of it was sold in April 2021 for N80,000,000. The market value of the part undisposed was professionally valued at N65,300,000. The remaining part was disposed of in August 2021 for N60,000,000 and N30,000 was incurred as expenses incidental to the sale.
The factory equipment was acquired in 2018. The company had difficulty in disposing of the asset, until a friend to one of the directors bought it in September 2021. The market value of the asset was N162,500,000 at the date of disposal. The company incurred N250,000 to refurbish the equipment before disposal.
Required:
As the company’s Tax Consultant, you are to submit a report to the Managing Director showing:
a. The capital gains (if any) and the capital gains tax payable on:
(i.) Disposal and subsequent acquisition of industrial building (ii.) Disposal of plant and machinery (iii.) Disposal of factory equipment (b.) State the due dates for filing of self-assessment return and payment of the tax computed on each of the assets disposed of.
(c.) Comment on the provisions of the Finance Act 2020 in respect of compensation for loss of office to be paid to the two staff disengaged by the company.
Answer
Sunny & Co (Tax Consultants)
Jaye Road, Mowe
Date ……
The Managing Director Yemmysea Beverages Limited Abeokuta
Dear Sir
RE: COMPUTATION OF CAPITAL GAINS TAX PAYABLE ON DISPOSAL OF ASSETS
I refer to your request relating to advice on tax payable on disposal of assets made by the company; due date for filing of returns and tax implication of compensation for loss of office to staff who are to be relieved of their jobs. My comments are as follows:
a. (i) Disposal and subsequent acquisition of industrial building
The capital gains made on disposal of asset in February 2021 was N38,462,000. But as a result of subsequent re-investment in new building for purposes of the business made in July 2021, the company was entitled to roll-over relief. The net capital gains, therefore, was N23,262,000 and capital gains tax payable was N2,326,200 (see appendix 1).
(ii) Disposal of plant and machinery There was a part disposal made in April 2021 and this generated capital gains of N9,249,828 and capital gains tax payable of N924,982.80. The second disposal made in August 2021 resulted in capital gains of N2,220,172 and capital gains tax payable of N222,017.20 (see attached appendix 2).
(iii) Disposal of factory equipment Factory equipment was disposed of in September 2021 to a friend to one of the directors for N160 million when the market value of the asset was N162.5 million. The tax authority, in line with the provisions of the Capital Gains Tax 2004 (as amended), would treat the disposal as made to a connected person. Hence, the market value of the asset would be used as the sales proceeds. This transaction generated a capital gain of N11,650,000 and capital gains tax of N1,165,000 (see attached appendix 3).
(b) Due dates for filing of self-assessment return and payment of the tax computed on each of the assets disposed of
Section 2 of the Finance Act 2020 specifies that every person having disposed a chargeable asset shall, not later than June 30 and December 31 of that year, compute the capital gains tax, file self-assessment return, and pay the tax computed in respect of the chargeable assets disposed in the periods.
In line with this provision of the Act, the disposals made by the company would be due for filing of self-assessment return and payment of capital gains tax as stated in appendix 4.
(c) Compensation for loss of office
Section 4(a) of Finance Act 2020 states that sums obtained by way of compensation for loss of office, up to a maximum of N10 million shall not be chargeable gains and subject to tax; provided that any sum in excess of N10 million shall not be so exempt but the excess amount shall be chargeable gains and subject to tax accordingly.
Section 4(b) further provides that any person who pays compensation for loss of office to an individual is required at the point of payment of such compensation to deduct and remit the tax due to the relevant tax authority. The tax so deducted shall be remitted within the time specified under the PAYE regulations.
Following the provisions of the Act, compensation for loss of office to be paid to Mr. Bala would attract capital gains tax of N200,000 (10% of the excess of N12 million over threshold of N10 million), which is to be paid to the tax authority by the recipient. Mr. Ekaite‟s compensation for loss of office of N7.5 million (which is below the threshold of N10 million) will not attract any capital gains tax.
Also, in remitting tax due on pay-as-you-earn to the State Internal Revenue Service, the amount of tax due on compensation for loss of office of both Mr. Bala and Mr. Ekaite should be computed and remitted to the tax office.
We hope that this report adequately represents the mandate assigned to us. Should you need any further clarification on this, we will be glad to address it.
Rosco Atanda Principal Consultant
Appendix 1: Disposal and subsequent acquisition of industrial building
N Sales proceeds
123,900,000 Less:
Cost of acquisition 85,000,000
Renovation expenses 288,000
Incidental cost 150,000 85,438,000 Capital gains
38,462,000
Roll-over relief computation
Lower of:
Sales proceeds 123,900,000 And
Amount re-invested 100,200,000 Less: Cost of acquisition of old asset
85,000,000 Roll-over relief
15,200,000
Computation of capital gains tax
N Capital gains
38,462,000 Less: Roll-over relief
15,200,000 Net capital gains
23,262,000
Capital gains tax (@ 10% of net capital gains)
2,326,200
Appendix 2: Disposal of plant and machinery Disposal in April 2021
Cost of part disposed = A x C
A + B
Where, A = sales proceeds = N80,000,000 B = market value of asset undisposed = N65,300,000 C = overall cost of asset = N128,500,000
Therefore, cost of part disposed = N80,000,000 x N128,500,000
N80,000,000+N65,300,000
= N70,750,172
Computation of capital gains tax N Sales proceeds 80,000,000 Less: Cost of acquisition 70,750,172 Capital gains 9,249,828 Capital gains tax (@ 10% of capital gains) 924,982.80
Disposal in July 2021
Cost of remaining assets = overall cost – cost of part disposed = N128,500,000 – N70,750,172
= N57,749,828
Computation of capital gains tax N Sales proceeds
60,000,000 Less:
Cost of acquisition 57,749,828
Incidental cost 30,000 57,779,828 Capital gains
2,220,172
Capital gains tax (@ 10% of capital gains) 222,017.20
Appendix 3: Disposal of factory equipment
Computation of capital gains tax
N N Sales proceeds
162,500,000 Less:
Cost of acquisition 150,600,000
Refurbishment cost 250,000 150,850,000 Capital gains
11,650,000
Capital gains tax (@ 10% of capital gains)
1,165,000
Appendix 4: Due date for filing of returns and payment of capital gains tax
Asset disposed
Disposal date Due date for filing of returns and payment of capital gains tax
Industrial building
February 2021 but funds realized was re-invested in July 2021
June 30, 2021
Plant and machinery
1st disposal in April 2021
June 30, 2021, 2nd disposal in August 2021 December 31, 2021
Factory equipment
September 2021
December 31, 2021
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- Author Salamat Hamid
- Professional Bodies ICA (Nigeria)
- Programs PROFESSIONAL PROGRAM
- Tags Asset Disposal, Capital gains tax, Compensation for Loss of Office, Factory Equipment, Finance Act 2020, Industrial Building, Plant and Machinery, Reorganization, Roll-Over Relief, Self Assessment.
- Series NOV 2022
- Subjects ADVANCED TAXATION
- Topics Capital Gains Tax (CGT), Tax Administration and Dispute Resolution, Tax Implications of Liquidation and Restructuring
- 20 Marks
AT – Nov 2022 – L1 – Q3 – Capital Gains Tax on Asset Disposals
Compute CGT on disposals of industrial building, plant/machinery, factory equipment during company reorganization; state filing/payment dates; comment on tax for staff compensation.
Question
Microfin Garment Nigeria Plc has been in business for many years as manufacturers of textiles. At the recently held annual general meeting, some of the shareholders observed the downward trend in the profitability, market share price, dividends declared and paid to owners of the business. It was also noted that a particular product line of the company, perhaps due to stiff competition from local and foreign competitors, was not doing well in the market. A complete reorganisation of the company was the resolution proposed and accepted by majority of members of the company who attended the annual general meeting. The exercise was to be completed within quarter 3 of the new financial year.
The Board of Directors, in complying with the resolution reached at the annual general meeting, met last month and took the following decisions:
(i) The General Manager (Mr. Chukwu Bala) and Operations Manager (Mr. Ojo Ekaite)
of the “problematic” segment that was not contributing to the overall
profitability of the company was to be relieved of their jobs.
(ii) The relieved staff were to be paid compensation for loss of office. Mr. Bala and Mr. Ekaite would receive N12 million and N7.5 million, respectively.
(iii) All the relevant production and administrative staff are to be redeployed to other branches of the company; and
(iv) Details of qualifying property, plant and equipment disposed are as follows:
Industrial building Plant and machinery Factory equipment
N‟000 Cost 85,000 128,500 150,600 Tax written down value 36,125 16,062.5 37,650 Sales proceeds (see note bullet 2)
123,900 80,000 60,000
160,000
Notes:
Industrial building was acquired in 2014. Towards the disposal of the asset in February 2021, the company spent N288,000 for renovation; and incidental cost of N150,000. The sum of N100,200,000 out of N123,900,000 realised from the disposal of the industrial building was used in July 2021 to acquire another building at the head office.
Plant and machinery were acquired in 2017. Part of it was sold in April 2021 for N80,000,000. The market value of the part undisposed was professionally valued at N65,300,000. The remaining part was disposed of in August 2021 for N60,000,000 and N30,000 was incurred as expenses incidental to the sale.
The factory equipment was acquired in 2018. The company had difficulty in disposing of the asset, until a friend to one of the directors bought it in September 2021. The market value of the asset was N162,500,000 at the date of disposal. The company incurred N250,000 to refurbish the equipment before disposal.
Required:
As the company’s Tax Consultant, you are to submit a report to the Managing Director showing:
a. The capital gains (if any) and the capital gains tax payable on:
(i.) Disposal and subsequent acquisition of industrial building (ii.) Disposal of plant and machinery (iii.) Disposal of factory equipment (b.) State the due dates for filing of self-assessment return and payment of the tax computed on each of the assets disposed of.
(c.) Comment on the provisions of the Finance Act 2020 in respect of compensation for loss of office to be paid to the two staff disengaged by the company.
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