ATAX – May 2016 – L3 – Q4b – Capital Gains Tax (CGT)

Analyse the transactions and determine the chargeable gains, provide an opinion on the transactions, and explain the role of the Federal Inland Revenue Service in handling bad debt.

Question

Your Tax Manager has just sent a memo in which you were asked to analyse the situation in a client’s file with the sole aim of determining the Chargeable Gains:

Contents of Memo:

Dr. Alexander Bold purchased a Duplex in Parkview Estate at a cost of N80 million on January 2009. It was used as a private residence. Another property was purchased in Banana Island in the year 2012, and Dr. Bold transferred the Parkview Estate Property to his wife as a birthday present on August 12, 2013. The market value of the property was N140 million. As a result of incessant flooding in Parkview Estate, the property was finally disposed of for N200 million on January 31, 2014 by the wife.
An option on a piece of land in Magodo, Lagos State, was sold by Dr. Bold for a sum of N120 million to Mr. Robert on July 1, 2010. Mr. Robert exercised the right to purchase the land for N150 million in 2013 and sold the property for N400 million in 2014.
Mr. Clyde, a friend of Dr. Bold, purchased a piece of property belonging to Bold and Wife Limited in Badagry at a cost of N240 million. The two parties agreed on installment payments starting with an installment of N80 million on July 1, 2010, and the balance of N80 million every 6 months thereafter. The last installment could not be settled on time because of Mr. Clyde’s illness, who managed to pay N20 million on January 1, 2013. The cost of the property to Bold and Wife Limited was N180 million.

Instalment Date	Amount Paid (₦)
July 1, 2010	80,000,000
January 1, 2011	80,000,000
July 2, 2011	40,000,000
January 1, 2013	20,000,000

Mr. Clyde eventually died on March 5, 2013, hence the balance of N20 million could not be recovered and this was written off as Bad Debt with the consent of the Federal Inland Revenue Service.

Mr. Saxon (S.A.N), a Legal Practitioner from the Chambers of Saxon in Lagos, was involved in a case on behalf of Dr. Bold’s wife. The case lasted for about 4 years and judgment was received in favor of the client. The fees were settled partly by cash and partly with an acre of land belonging to Mrs. Bold at Lekki Phase Two in Lagos. Although the debt was N85 million, the property was valued at N60 million. Mr. Saxon eventually sold the property for N220 million.

Required:

i. Chargeable gains (5 marks)
ii. Opinion on all the above transactions (9 marks)
iii. The role of Federal Inland Revenue Service on the issue of Bad Debt on payment by Mr. Clyde (2 marks)

Answer

(b)

(ii) Opinion:

Since the transaction between Dr. Alexander Bold and his wife was a gift, the consideration is deemed to be the amount that would secure the disposal, meaning that no gain or loss would accrue to Dr. Bold. However, since Mrs. Bold later disposed of the property to a third party, a Chargeable Gain arises based on the period of ownership by both Dr. Alexander Bold and his wife.
When an option is exercised, the consideration paid for the option is incorporated into the total consideration for the asset itself, forming a single transaction for both parties involved. However, if the grantee (buyer) incurs a loss on the disposal of the option, it will not be considered an allowable loss unless the disposal is made at arm’s length to a person not connected to the grantee.
When consideration (or part of it) is paid in instalments over a period exceeding 18 months from the date of disposal, the Chargeable Gain is deemed to accrue proportionally over the period of the payments. The Chargeable Gain deemed to accrue in each year of assessment is calculated as follows:

It should be noted that the Capital Gains Tax Act stipulates that the full amount of consideration for the disposal should be brought into account, without any discount for postponement of payment, the risk of non-recovery of the consideration, or the right to receive any part of the consideration.
If part of the consideration becomes bad debt, adjustments must be made to the tax liability. If it is later proven to the satisfaction of the relevant tax authority that part of the consideration was not recoverable, a discharge or repayment of tax may occur.
When a property is acquired by a creditor in satisfaction of a debt, the property is not considered disposed of by the debtor, nor is it acquired by the creditor (in this case, Mr. Saxon) for a consideration greater than its market value at the date of acquisition.
If the creditor (Mr. Saxon) later disposes of the property, and no Chargeable Gain arises from the initial acquisition of the property by the creditor, the gain on the disposal will be adjusted, so that it does not exceed the gain that would have accrued if the creditor had acquired the property for a consideration equal to the amount of the debt.

(iii) Bad Debt Payment by Mr. Clyde:

On the issue of the bad debt payment by Mr. Clyde, Bold and Wife Limited would need to demonstrate to the Federal Inland Revenue Service that the N20 million of the sales proceeds has become bad debt. If accepted, the company would be entitled to a tax credit or a tax refund of N500,000, which represents the Capital Gains Tax on the Chargeable Gain arising from the bad debt of N20 million.

Workings: