TAXATION IN PROPERTY LAW PRACTICE IN NIGERIA
ALL YOU NEED TO KNOW IN TAXATION IN PROPERTY LAW PRACTICE IN NIGERIA
PROPERTY LAW TRANSACTION
TAXATION IN PROPERTY LAW PRACTICE IN NIGERIA
Taxation involves a monetary imposition on persons, property, transactions to yield public revenue. Taxation is compulsory and not voluntary - forceful imposition. For the purpose of property law practice, taxation or taxes imposed are:
. Stamp Duties
a. Value Added Tax
b. Capital Gains Tax
c. Personal Income Tax
d. Companies Income Tax
e. Tenement Rate
f. Land Use Charge
g. Consent fees
h. Registration fees
i. Estate duty
The regulatory laws are:
. Stamp Duties Act
a. Value Added Tax Act
b. Capital Gains Tax Act
c. Personal Income Tax Act
d. Companies Income Tax Act
e. Tenement Rate Laws of the states.
f. Land Use Charge Law of Lagos state
g. Finance Act
h. Land Instrument Registration Laws
i. Exchange duties Act
DEFINITION OF TAX
A monetary charge imposed by the government on property and person.
The Federal Government through the Federal Inland Revenue Services. The taxes collected by it includes:
· Companies Income Tax
· Personal Income Tax of residents of the FCT, Abuja e.t.c
· Stamp Duties on corporate bodies and residents of the FCT, Abuja
· Capital Gains Tax on residents of FCT and corporate bodies
· Value Added Tax
State Government through the Board of Inland Revenue of the state. The taxes collected by it includes:
· Personal Income Tax on residents (individual)
· Capital Gains Tax (transactions between only individuals)
· Stamp Duties on instrument executed by individuals.
· Consent fees
· Registration fees
· Estate duty
Local Government Council, the tax collected by it is either tenement rate in other states and land use charge in Lagos state
Stamp duties are regulated by the Stamp Duties Act and come into play in perfection stage of conveyance or instrument
Importantly, stamp duties is not paid on transaction or property or persons but on the document that evidences the relationship between the parties thus a document tax and no document can be stamped unless covered by the Act pursuant to Section 23 SDA. The following are the documents to be stamped:
· Agreement or contract accompanied by a deposit
· Agreement for a sale of property
· Power of Attorney
There are two ways of calculating stamp duties
0. Ad valorem: this is the general way thus stamp duties are charged ad valorem generally. Section 4(2) Stamp Duties Act. Ad valorem is a computation based on the value of the property. It is determined by the consideration and in accordance with the scale stated in the schedule. The higher the consideration, the higher the amount to be paid in stamp duty. The computation is as follows.
· Conveyances on sale - 75k for every N50, s. 52
· Leases - N30 for every N200
· Mortgages - 75k for every N200
1. Fixed duty - this computation disregard the value of the property and give a flat rate (nominal rate) s. 25 SDA. Payable on deed poll such as power of attorney.
TYPE OF DOCUMENT TO BE STAMPED
· Documents are stamped according to their legal effect. See Eastern National Omnibus co Ltd. V IRC.
· Documents are to be stamped as soon as they are executed.
· If a deed was signed and sealed but not yet delivered, it should not be stamped.
Lagos state provides for 2% of the consideration but stick to the general rule. The authority to stamp the document depends on the parties involved. If only individuals are involved then, the state Board of Internal Revenue is to stamp; if a corporate body is involved, the Federal Inland Revenue Service will stamp. A document is to be stamped as soon as it is executed. For a deed, it is executed when it has been delivered. Thus a deed which has not been delivered cannot be stamped. For instance, contract of sale is executed when it has been exchanged. Documents are to be stamped within 30 days of its execution and there is penalty for late stamping.
There are consequences for failure to stamp a document. First, such document cannot be registered and the document cannot be admissible in evidence - s. 22(4) SDA. Note that it is only documents executed in Nigeria and relating to property in Nigeria, also that person producing it must pay penalty and unpaid duty - s. 23 SDA.
Capital Gains Tax (CGT)
CGT is a tax that is charged on the gains accruable on a disposal of assets. A disposal of assets occurs when any capital sum is derived from a sale, lease, transfer, assignment, compulsory acquisition or other disposition of assets. See section 6(1) Capital Gains Tax Act (CGTA)
The following are not disposal of assets for the purpose of CGT:
1. Conveyance or transfer by way of security of an asset (mortgage or charge). See section 7(4) CGTA
2. Transfer or reconveyance on redemption of a security. See section 7(4) CGTA
3. Devolution on personal representative of assets of a deceased person. See section 8(4) CGTA
4. Vesting in beneficiaries, the assets of a deceased person. See section 8(4) CGTA
In all the fore going instances, CGT is neither charged nor paid because there is no disposal of assets.
The chargeable gain is the difference between the cost of the asset and the consideration received on its disposal.
The tax is on the gain. Thus, if no gain is made or realised from the disposal of an asset, CGT will NOT be charged or paid.
The rate of CGT is 10% of the gain made. See section 2(1) CGTA
Allowable Income or expenses: before the tax is computed, allowable incomes or expenses are deducted from the gain. Allowable incomes or expenses are the expenses that are wholly, exclusively and necessarily incurred for the acquisition of the asset together with incidental costs. Section 13 CGTA. Allowable income or expenses include:
1. The cost of acquiring the property. That is, the amount or value of consideration spent in acquiring the asset
2. Incidental costs of the acquisition
3. Cost of improvements to the property. That is, expenses incurred in enhancing the value, state or nature of the asset before disposal
4. Any amount incurred in establishing, preserving or defending the deposer's title to or right over the asset; and
5. Incidental costs of the disposal which may include costs of advertisements, valuation and fees, commission and remuneration paid to professionals involved in the disposal.
Persons exempted from paying CGT:
1. Ecclesiastical, charitable, or educational institutions of a public character
2. Statutory/registered friendly societies
3. Co-operative societies registered under the co-operative society laws of a state
4. Trade unions registered under the Trade Unions Act and the disposal of asset or gain must be connected to the purposes of the union for the exemption to apply. See section 26(1) CGTA
5. Gains accruing to any local government
6. Disposition by way of gifts. See section 40 CGTA
7. Gains accruing to any company or authority established by law to purchase and export commodities from Nigeria or for fostering economic development of Nigeria. See section 27 CGTA
Computation of CGT: section 12 CGTA
The computation of CGT involves the following seven (7) steps:
1. Consideration received =
2. Subtract Cost of acquiring the property from consideration received =
3. Gain made =
4. Add up all allowable incomes and expenses and get their total
5. Deduct the total allowable income or expenses from gain made to get “chargeable gain”
6. Calculate CGT with this formula: 10/100 * x/1 that is, 10 divided by 100 multiply by X over 1. NOTE that X stands for “Chargeable gain”.
7. CGT payable =
Note the following illustration. Mr. A in 1978 purchased a landed property for N500, 000. In 1980, he defended an action against him on the land from the High Court to the Supreme Court and it cost N5, 000, 000. In 1992, he pulled down the building on it and constructed a block of six flats worth N5, 000, 000. In January 2013, he sold the land for N50, 000, 000 and spent N2, 000, 000 for advertisement and lawyer. His capital gains tax
· Consideration received = 50, 000, 000
· Subtract Cost of acquiring the property from consideration received = 50, 000, 000 – 500, 000
· Gain made = 49, 500, 000
· Add up all allowable incomes and expenses and get their total:
o Cost of litigation: 5, 000, 000
o Cost of improvement: 5, 000, 000
o Incidental costs of disposal: 2, 000, 000
§ Total allowable incomes: 12, 000, 000
· Deduct the total allowable income or expenses from gain made to get “chargeable gain”: 49, 500, 000 – 12, 000, 000
§ Chargeable gain is 37, 500, 000
· Calculate CGT with this formula: 10/100 x/1 that is, 10 divided by 100 multiply by X over 1. NOTE that X stands for “Chargeable gain”.: 10/100 37, 000, 000/1
· CGT payable = 3, 750, 000
Capital gains tax is paid on the following transactions namely:
· Compulsory acquisition - s. 6(1) CGTA
Ideally because it is the transferor that is benefiting, he should pay but because payment of the tax is a condition precedent to perfection of title, it is the transferee in practice that pays. Capital gains tax is not paid on mortgage transaction because there is no gain in mortgage. It is also, not paid in gift of land.
Value Added Tax
The value added tax governed by the value added tax Act is tax paid on goods and services. Professional services rendered by legal practitioners come into play here. First a legal practitioner is expected to have an account with the authority in charge of value added tax. The value added tax is 5% of the legal practitioner’s fees. The VAT is not retained by the legal practitioner but remitted to the relevant authority by Federal Inland Revenue Services. VATable person includes all professionals and legal practitioner is a professional. The Federal Inland Revenue Services is in charge of VAT.
Personal Income Tax
Personal Income Tax is regulated by Personal Income Tax Act. This tax is paid by individual, a group or business and not a limited liability company. An individual may be assessed on the pay as you earn scheme -PAYE and upon payment of tax, a tax clearance certificate is usually given pursuant to section 84(1) PITA. Relevant authority or state where the personal income tax can be paid to is determined by residence - where the person resides and not where he works.
Companies Income Tax
Companies Income Tax is regulated by the Companies Income Tax Act, and it is paid by companies to the Federal Inland Revenue Services.
Consent fee is the payment made in obtaining the consent of the Governor of a state in furtherance of s. 22 Land Use Act. Consent is obtained in lease, assignment, mortgage and other form of alienation of interest. The fee is paid to Governor through the Ministry of Land. In Lagos state, the rate payable is 8% of the assessed value of the property. Only the states of the federation can collect this fee.
This is the fee paid for the registration of instrument at the Land's Registry. In Lagos state, it is calculated at 3% of the assessed value of the property. This is payable to the government of each state.
This is payable in respect of a deceased's real and personal property. The amount payable as estate duty is 10% in Lagos state and it is calculated based on the gross value of the estate.
This is charged by virtue of the Tenement Rate Law of the various states. The tenement rate is payable annually on buildings situated within a particular local government area. It is also known as the property tax in some areas. In Lagos state, it forms part of land use charge under the Land Use Charge Law of Lagos. The considerations for the land use charge are:
· The location of the property
· The purpose for which the property will be used
· Nature of the property
And it is assessed annually
Ethical considerations for solicitors in respect of taxation
· A solicitor must advise his client to pay taxes on property transaction
· A solicitor must pay his tax when he receives an income
· A solicitor should not collude with his client to evade payment of tax.
· Do not reduce or save money for your client.
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