CAPITAL GAINS TAXlsk.or.ke/Downloads/CGT Presentation - LSK CLE October 2016.pdf · Background to...
Transcript of CAPITAL GAINS TAXlsk.or.ke/Downloads/CGT Presentation - LSK CLE October 2016.pdf · Background to...
CAPITAL GAINS TAX
Ken Njuguna, Anjarwalla & Khanna Advocates 14th Oct. 2016
2
Background to the Capital Gains Tax
Capital Gains Tax was re-introduced effective from 1st
January 2015 By the Finance Act, 2014.
It was suspended in 1985 with intention of nurturing
growth in the real estate and capital markets sectors.
Income was taxed. Capital was spared from taxation.
This led to claims that the tax system was not equitable.
Expanded Budget Occasioned by Devolution forced the
Treasury to go overdrive to expand revenue base for
Government financing; CGT was a low hanging cherry.
3
Overview of Capital Gains Tax
Para 2 of the Eighth Schedule: any gain realised by a person
(whether a company or an individual) on the transfer of property
situated in Kenya, constitutes taxable income under section 3(2)(f) of
the ITA.
4
Legislative Framework
S.3 (2)(f): tax is chargeable on capital gains.
S.15 (3)(f) : taxpayers can offset current year capital losses against current year capital gains.
Sec. 34(1)(h) : Gains arising from the transfer of property shall be taxed at a rate of 5%.
Eighth Schedule: any gain realised on the transfer of property constitutes taxable income.
5
Transactions Subject to CGT
COMPANY INDIVIDUAL
interests in or
rights to land
marketable securities (Unlisted Shares)
property (as defined under the IGPA)
marketable securities (Unlisted Shares)
road vehicles
6
Property Subject to CGT cont’d
Offshore Hold Co.
Kenyan Company
Kenyan Property
Currently no CGT on
sale of shares in
offshore vehicle
CGT on sale of shares
CGT on sale of
property
7
Capital Gains Computation
Chargeable gain x 5 % = CGT Payable
Transfer Value
Adjusted Cost
Chargeable Gain
Illustration
YEAR ACTION VALUE (KES)
1980 Bought 2 acre plot of land in
Eldoret Town
20,000
1985 Cost of building office block 650,000
1989 Cost of putting up perimeter wall 250,000
Adjusted cost 920,000
2016 Property sold in 2016 300,000,000
Amount subject to Capital Gains Tax (CGT):
KES 300,000,000 – KES 920,000 = KES 299,080,000
(Transfer Value – Adjusted cost = Chargeable gain)
CGT = 299,080,000 X 5% = KES 14,945,000
9
1. When does a transfer arise?
2. What is the value of the transfer?
3. How is the adjusted cost arrived at?
4. Are there any exemptions available?
5. Due date for paying CGT ?
Key issues to Consider in CGT
10
When Does a Transfer Arise?
• on sale, exchange, conveyance of property including by way of gift
• whether for consideration or not Disposal
• on the loss, destruction or extinction of property
• unless compensation is received and is used to re-instate the property within one year
Destruction
• on the abandonment, surrender, cancellation, forfeiture or expiration of substantially all rights to property
Forfeiture
11
When Does a Transfer Arise?
Cont’d
There is no transfer of property on:
transfer to secure a debt/loan i.e. mortgage
issuance by a company of its shares i.e. subscription for shares
vesting in personal representative and from personal representative to beneficiary pursuant to succession process
12
When Does a Transfer Arise?
Cont’d
There is no transfer of property on:
vesting in a liquidator/ official receiver
transfer between spouses / immediate family pursuant to divorce settlement
transfers between a trustee and a beneficiary
Transfer of assets to immediate family or to a family owned company
13
Transfer Value - Arm’s Length
Transfers
14
Transfer Value - Non-Arm’s Length
Transfers
Non-arm’s length
transfers
Bargain not at arm’s length
Gifts
Related party transaction
Consideration cannot be
valued
15
Market Value
Non-arm’s length
transaction
Transfer value market value of property at the time of transfer.
Adjusted cost
lower of:
market value of property at the
time of acquisition
consideration amount used in
computing stamp duty
16
Adjusted Cost
Historical Costs
Incidental Costs
Cost of Improvement
Cost of defending right over property
Adjusted Cost
17
Incidental Costs
INCIDENTAL COSTS
professional fees including
legal, valuation & advertising
transfer costs
(including stamp duty)
just and reasonable
costs as determined by Commissioner
18
Exemptions EX
EM
PTIO
NS
where income is chargeable to other taxes
transfer of machinery subject to wear & tear deductions
private residence occupied by owner for 3 years
transfer value below K.Shs. 3,000,000/=
agricultural property of less than 50 acres outside a municipality
sale under administration of deceased’s estate within 2 years of finalisation of succession proceedings
19
Land and buildings – On or before transfer is
lodged at Lands Registry (Finance Act 2015)
Unlisted shares – No clarity but view is that CGT
should be paid before registration
Real estate transactions - How will Seller fund the
CGT payment ?
Due Date
20
Some Future Changes…
1. Indexation
The Adjusted Cost is increased by the multiplying
with a factor based on the Consumer Price Index or
the Retail Price Index.
Example of an indexation table set out below.
INDEXATION
1980 245.30
1990 175.25
2000 72.30
2010 10.50
2014 2.56
2016 1.00
Illustration
YEAR ACTION VALUE (KES)
1980 Bought 2 acre plot of land in
Eldoret Town
20,000
1985 Cost of building office block 650,000
1989 Cost of putting up perimeter wall 250,000
Adjusted cost 920,000
2016 Property sold in 2016 300,000,000
Amount subject to Capital Gains Tax (CGT):
KES 920,000 x 245.30 = KES 225,676,000
KES 300,000,000 – KES 225,676,000 = KES 74,324,000
CGT = KES 3,716,200
CGT WITHOUT INDEXATION = KES 14,945,000
22
Some Future Changes…
2. Taper Relief
Tapering relief works by discounting the amount of chargeable gains that
are subject to CGT.
The longer the property is held the higher the discount applied to the
chargeable gains.
An example of tapering relief table is set out below (based on the UK
model)
Number of whole years in
qualifying period Percentage of gain chargeable
1 100%
3 80%
5 60%
7 40%
9 30%
10 and above 25%
Illustration
YEAR ACTION VALUE (KES)
1980 Bought 2 acre plot of land in
Eldoret Town
20,000
1985 Cost of building office block 650,000
1989 Cost of putting up perimeter wall 250,000
Adjusted cost 920,000
2015 Property sold in 2015 300,000,000
Amount subject to Capital Gains Tax (CGT):
KES 300,000,000 – KES 920,000 = KES 299,080,000
TAPER RELIEF = KES 299,080,000 x 25%
CGT = 74,770,000 X 5% = KES 3,738,500
CGT WITHOUT TAPER RELIEF= KES 14,945,000
Questions
The ALN Network
BOTSWANA
BURUNDI
ETHIOPIA
KENYA
MALAWI
MAURITIUS
NIGERIA
RWANDA
SUDAN
TANZANIA
UGANDA
ZAMBIA
Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.
NAIROBI Anjarwalla & Khanna
The Oval, 3rd Floor
Junction of Ring Road Parklands and Jalaram road
PO Box 200-00606, Sarit Centre, Nairobi, Kenya
T +254 (0) 20 364 0000, + 254 (0) 703 032 000
F +254 (0) 20 364 0201
MOMBASA Anjarwalla & Khanna
SKA House, Dedan Kimathi Avenue PO Box 83156 – 80100, Mombasa, Kenya T +254 41 2225090/6
F +254 41 2224996
KENNETH NJUGUNA, Principal Associate T +254 (0) 703 032 312 F +254 (0) 20 364 0201 E [email protected]