ATAX – May 2017 – L3 – Q3a – Capital Gains Tax (CGT)

Compute Capital Gains Tax for hire purchase transactions and explain the implications of hire purchase interest on CGT.

Question

Global Company Nigeria Limited, a construction company based in Abuja, commenced business on January 7, 2009. The company has struggled to acquire necessary equipment due to poor financial results.

At a directors’ meeting on November 6, 2012, the company decided to approach a finance house for assistance. They provided the following information:

The company purchased an excavator on hire purchase on March 1, 2013, and paid a deposit of N32,000,000.
The excavator’s cost price was N55,000,000, with the balance payable in 25 monthly installments of N1,200,000 starting April 1, 2013.

The excavator was sold as follows:

For N65,000,000 after installment payments on January 1, 2014.
For N69,000,000 after installment payments on November 1, 2014.

You are required to:

i. Calculate the Capital Gains Tax (CGT) for the relevant Assessment Year, assuming the sales values above. (14 Marks)
ii. Explain the implications of hire purchase interest on Capital Gains Tax computations. (2 Marks)

Answer

GLOBAL COMPANY LIMITED
COMPUTATION OF HIRE PURCHASE INTEREST

a(i) GLOBAL COMPANY LIMITED
COMPUTATION OF CAPITAL GAINS TAX
FOR ASSESSMENT YEAR 2014
(SALE OF EXCAVATOR ON 1/1/2014)

GLOBAL COMPANY LIMITED
COMPUTATION OF CAPITAL GAINS TAX
FOR ASSESSMENT YEAR 2014
(SALE OF EXCAVATOR ON 1/11/2014)

WORKINGS

Comments on Hire Purchase Interest in Capital Gains Tax Computations

Non-Allowability of Deductions for CGT:
- Expenses or sums that are allowable as deductions in computing the profits or losses of a trade for income tax purposes are not allowable for Capital Gains Tax computations.
Comparison of Capital Gains Tax (CGT) Liability:
- Based on the earlier computations, the company will incur a higher Capital Gains Tax liability if the property was sold on January 1, 2014, as the gain realized during that period was greater compared to a later sale.
Treatment of Hire Purchase Costs:
- For tax purposes, the cash price of the asset under hire-purchase terms is considered the acquisition cost.
- The hire purchase charges (interest) are treated as allowable deductions under Section 20 of the Companies Income Tax Act (CITA). These deductions are applied in arriving at the assessable profits for income tax purposes.

Tags: Assessment Year, Capital gains tax, Hire Purchase, Tax computation
Level: Level 3

Topic: Capital Gains Tax (CGT)

Uploader: Kofi