The sale of a plot or farm cannot be equated to everyday transactions relating to buying and selling of movable articles or implements. Such a sale is predominantly characterized as a sale of an investment unless someone is in the business of selling such properties on which the land becomes his or her trading inventory. Accordingly, the occurrence of such transactions is sporadic so to say, resulting in most landowners neglecting the resultant tax obligations. In essence, property disposals result in gains technically referred to as capital gains. If one buys a plot at P100 000 and sells it at P500 000, the potential capital gain, before other deductions, is P400 000. Let us have a look at what the tax laws say about this tax.
The tax laws generally impose capital gains tax on gains realized from the sale of immovable property. The tax is assessed on the selling price less the cost of acquiring the farm, incidental disposal costs and some inflation allowance, i.e., the capital gain. If you dispose of a farm you inherited, the cost in such an instance will be the market value of the farm at that point in time the farm devolved to you. In addition to the cost of the land, the Income Tax Act permits the seller to deduct costs of any additions such as durawalls, pavements, extensions, disposal costs and an inflation adjustment. Further to note is that the cost of acquiring a capital asset i.e., the farm or plot, includes costs that are incidental to such acquisition, including tax advice, legal expenses and transfer taxes.
CGT is determined using sliding scales which end with a tax rate of 25% on the higher bracket, for individuals. Companies suffer the tax at 22% for resident companies and 30% for non-resident ones registered at CIPA as branches.
On the other hand, the acquisition of immovable property triggers another tax known as transfer duty. The tax is payable to the Registrar of Deeds. The transfer duty is basically triggered by transfer of ownership of a farm or plot, among others, and it is assessed in the hands of the buyer. But that was just meant to be a teaser as I am not in the mood of talking about transfer duty at length today.
You probably may be wondering what you must do for previous disposals of immovable properties where you didn’t pay tax. Well, let me leave that to you to decide on the way forward. I however advise that you consider the tax in the next similar transaction you will embark on. If you are a business advisor, you may need to share a few hints with your clients but don’t forget that you may require expert tax advice! Lastly, this tax is not payable under instances where two or more resident companies restructure and such reorganization does not result in a change in the beneficial ownership of assets changing hands. Cheers buddy and thanks for reading