- 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 negative impact on the company’s profits. The management has decided to re-organise the business in a way to satisfy the customers better.
The following transactions were extracted from the books of the company:
(i) June 2017: Acquisition of an acre of land at the outskirt of the State capital forN8,500,000. 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; and
(v) July 2023: Acquisition of a new acre of land in the town for N45,000,000 (utilised all the proceeds from the disposal of the land).
This is expected to be used for 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)
Answer
ECO& Co (Chartered Accountants)
Zaria Road, Kaduna
Date: The General Manager Kanadu Nigeria Limited Kaduna
Dear Sir,
RE: TAX MATTERS
We refer to your request on the computation of capital gains tax payable, cost of undisposed property, roll-over relief and due date(s) for the payment of the tax liabilities in respect of some transactions embarked upon by the company. Our comments are as follows:
a.
Capital gains tax payable As shown in the attached appendix 1, the company made a chargeable gain ofN10,200,000 on the disposal of part of its land. In line with the provisions of Capital Gains Tax Cap C1 LFN 2004 (as amended), the company will pay tax at the rate of 10% and this gives N1,020,000. This should be paid to the Federal Inland Revenue Service integrated office in Kaduna.
b.
New cost of undisposed property This is arrived at by deducting the cost of the part (land) disposed from the total cost of the property. That is, N75,000,000 – N15,300,000 = N59,700,000.
c.
Roll-over relief The company utilised the whole proceeds derived from the disposal of land (N25,500,000) in acquiring another land in the State Capital for the purpose of the business. However, the re-acquisition of the new land took place more than 12 months from the date of the disposal (May 2022 – July 2023). The Capital Gains Tax Act 2004 (as amended) specifies as part of conditions for grant of roll-over relief, that re-acquisition of a new asset must take place within 12 months of disposal. In view of this provision of the Act, the company does not qualify for any roll-over relief.
d.
Due date(s) for the payment of tax liabilities The disposal of the land took place in May 2022. In line with the provisions of Section 2, Finance Act 2020), the due date for the payment of the capital gains tax is June 30, 2022.
We hope this report adequately represents the mandate given to us. Should you require further clarification, we will be glad to address it.
Yours faithfully, For: ECO & Co (Chartered Accountants)
Tunji Ojo Principal Partner
Appendix 1: Determination of capital gains tax
| N‟000 | |
|---|---|
| Cost of land | 8,500 |
| Sand filling | 1,500 |
| Factory cost | 65,000 |
| Total cost of the factory | 75,000 |
| N‟000 | |
|---|---|
| Sales proceeds | 25,500 |
| Less: Cost of acquisition (W1) | 15,300 |
| Chargeable gain | 10,200 |
Capital gains tax @ 10% of N10,200 1,020 Workings 1: Cost of part disposed Cost = A x C
A + B Where, A = Sales proceeds = N25,500,000 B = Market value of part undisposed = N99,500,000 C = Overall cost of the asset = N75,000,000
Therefore, Cost =
N25,500,000
N25,500,000 + N99,500,000 𝑥 N75,000,000
=
N25,500,000
N125,000,000 𝑥 N75,000,000
= N15,300,000
- Topic: Capital Gains Tax (CGT), Tax Administration and Dispute Resolution
- Series: MAY 2024
- Uploader: Samuel Duah