CAPITAL GAINS FROM REALISATION OF INTEREST IN LAND OR BUILDINGS

Size: px

Start display at page:

Download "CAPITAL GAINS FROM REALISATION OF INTEREST IN LAND OR BUILDINGS"

Clement Goodman
5 years ago
Views:

1 Practice Note No 02/2004 Date of Issue 15 th December 2004 CAPITAL GAINS FROM REALISATION OF INTEREST IN LAND OR BUILDINGS 0.0 TAX LAW. 0.1 This Practice Note applies in respect of the taxation of capital gains income derived in conducting an investment from realisation of an interest in land or buildings situated in the United Republic. 1.0 INTERPRETATION. 1.1 In this Practice Note, unless the context requires otherwise - Act means the Income Tax Act, Definitions and expressions used in this Practice Note that are used in the Act have, unless the context requires otherwise, the same meaning in this Note as they have in the Act. 2.0 THE APPPLICATION OF THIS PRACTICE NOTE This Practice Note considers: 2.1 Important features in determining whether or not a transaction is considered as realisation of an interest in land or building and capital gains, if any which arise from such transaction is liable to tax as such; 2.2 Exemptions; 2.3 Mode of computation and deductions; 2.4 Mode of taxation of capital gains; 2.5 Tax on capital gains in case of individuals; 2.6 Tax on capital gains in case of entities.

2 4.0 HOW THE LAW APPLIES. 4.1 Realisation. A person who owns an interest in land or building shall be treated as realising the asset; (a) When the person parts with ownership of the interest including when the interest is sold, exchanged, transferred, distributed, cancelled, redeemed, destroyed or surrendered in the case of interest of a person who ceases to exist, excluding a deceased individual, immediately before the person ceases to exist. In the case of interest owned by an entity at the moment the underlying ownership of an entity changes by more than fifty percent as compared with that ownership at the time during the previous three years except when for a period of two years after the change the entity:- (i) conducts the business or where more than one business was conducted, all of the businesses that it conducted at any time during the twelve months period before the change and conducts them in the same manner as during the twelve months period; and (ii) conducts no business or investment other than those conducted at any time during the twelve months period before the change. 4.2 Important features The provisions of the Act of advance payment of income tax by quarterly instalments do not apply to tax on capital gains on realisation of interest in land or buildings. Where an instalment payer derives a gain in conducting an investment from the realisation of an interest in land or building situated in the United Republic, the person shall pay income tax by way of single instalment The following transactions are not considered as realisation subject to capital gains income tax and capital gains, if any, which arise from such realisation are exempt from capital gains income tax.

3 (a) (c) Distribution of the investment asset to its shareholders on its liquidation. Distribution of the investment asset on dissolution of a firm, body of individuals or association of persons. Any transfer in a scheme of amalgamation of an investment asset by the amalgamating company to the amalgamated company if the amalgamated company is a Tanzanian company The capital gains tax shall be paid before the title to the interest is transferred and the Registrar of Titles shall not register such a transfer without the production of a Certificate of the Commissioner certifying that the tax has been paid or that no tax is payable Where the interest is realised for inadequate consideration being less than the fair market value of the interest and the Commissioner has reason to believe that the realisation is effected with the object of avoiding or reducing the liability for payment of tax under capital gains, the Commissioner may adopt the fair market value of the interest against the value declared by the instalment payer. 4.3 Exemptions Realisation of a private residence. Where a private residence of an individual is realised the capital gain arising as a result of the realisation of such residence is not to be included in the capital gains income provided the following conditions are fulfilled: (a) The residence has been owned continuously by the individual for three years or more and lived in by the individual continuously or intermittently for a total of three years or more; and The interest was realised for a gain of not more than shillings 15,000, Realisation of interest in land used for agricultural purposes. Where interest in land held by an individual that has market value of less than shillings 10,000,000 at the time it is realised and has been used for agricultural purposes for at least two of the three years prior to realisation, the gain, if any, which arise from the transaction is not to be included in capital gains income.

4 4.4 Mode of computation of capital gains. Capital gains income is calculated as follows:- From the full value of consideration received or accruing as a result of the realisation of the interest in land or buildings, the following amounts shall be deducted to arrive at the amount of the gains: (a) (c) The cost of acquisition of the interest The expenditure incurred on any improvement to the asset Expenditure incurred wholly and exclusively in connection with the realisation, such as stamp duty, registration charges, legal fees, brokerage etc. 4.5 Mode of taxation. For years of income commencing on or after 1 July, 2004 the income chargeable under capital gains is to be included in the person s gross total income for the year of income, where the person is required under the Act to file a return of income. 4.6 Tax on capital gains in case of individuals An individual instalment payer who derives capital gains shall pay income tax equal to (a) in the case of a resident individual, ten percent of the gain, or in the case of a non-resident individual, twenty percent of the gain In the case of a resident individual who derives a capital gain in realisation of interest in land or building the individual shall pay tax as follows:- (a) the greater of (i) the individual s total income less the gains; or (ii) shs. 720,000/= shall be taxed at the specified individual resident income tax rates as though it was the only total income of the individual; and the balance of the total income shall be taxed at the rate of 10 percent.

5 Example 1 Mr. Y was resident during the year He sold his personal building which was not used for his residence for shs. 40,000,000/=. The building was acquired for shs. 15,000,000/= four years back on which he spent shs. 3,000,000/= on improvement and shs. 1,500,000/= in connection with the sale of the house. Mr. Y also had business income of shs. 16,000,000/= during the year. Capital gains tax computation Business income shs. 16,000,000 Capital gains: Sale sh. 40,000,000 Less: Cost 15,000,000 Expenses 1,500,000 16,500,000 23,500,000 Total income shs. 39,500,000 Tax to be computed on Total income shs. 39,500,000 Less gain 23,500,000 Other income shs. 16,000,000 Shs. 16,000,000/= to be taxed at individual resident tax rates Capital gains - shs. 23,500,000 at 10 percent i.e. capital gains tax shs. 2,350,000/=. Example 2. Mr. M a resident individual realised gross receipt of shs. 4,000,000/= which he acquired three years back for shs. 1,000,000/=. Mr. M incurred no expenditure on improvement and the sale and had no other income during the year. Capital gains tax computation Receipts on realisation shs. 4,000,000 Cost of acquisition 1,000,000 Capital gains shs. 3,000,000 Other income NIL Total income shs. 3,000,000 Less shs. 720,000 (threshold) 720,000 Taxable gains 2,280,000 Tax at 10% rate shs. 228,000

6 Example 3 If Mr. N was non-resident during the year the capital gains tax would be computed as follows: Gross gains shs. 4,000,000 Less cost 1,000,000 Capital gains shs. 3,000,000 Tax at 20% shs. 600,000 Example 4 If Mr. Z realized the interest in his house, which he acquired for shs. 1,000,000 the previous year, for shs. 1,800,000 and during the year he had business loss of shs. 1,000,000/=. Mr. Z had unrelieved capital loss of shs. 10,000 from his realization of interest in land the previous year. The Capital gains will computed as follows:- Business loss shs. (1,000,000) Capital gains Receipts shs. 1,600,000 Less cost 1,000,000 shs. 600,000 Capital gains tax Income shs. 800,000 Less capital loss 10,000 shs. 790,000 Less threshold 720,000 Taxable gains shs. 70,000 Capital gains tax at 10% shs. 7,000/= Note: Business loss is not deductible against capital gains; only capital loss is deductible against capital gains. 4.7 Tax on capital gains in case of entities. Capital gains income of entities is charged to tax at the rates of 10 percent for residents and 20 percent for non-residents of the gains amount.

THE INCOME TAX ACT, CAP. 332 PRACTICE NOTE TAXATION OF GAINS FROM THE REALISATION OF INTEREST IN LAND OR BUILDINGS

ISO 9001:2008 CERTIFIED THE INCOME TAX ACT, CAP. 332 PRACTICE NOTE TAXATION OF GAINS FROM THE REALISATION OF INTEREST IN LAND OR BUILDINGS PRACTICE NOTES NO. 03/2013. DATE OF ISSUE 1 ST NOVEMBER, 2013