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 1ST NOVEMBER, 2013
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TAXATION OF GAINS FROM REALISATION OF INTEREST IN LAND OR BUILDINGS
Practice Note No. 03. /2013
Date of Issue 1st November, 2013
Contents
Pages
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TAX LAW. .......................................................................................................................... 1
INTERPRETATION............................................................................................................ 1
THE PURPOSE OF THIS PRACTICE NOTE ................................................................... 1
HOW THE LAW APPLIES. ............................................................................................... 2
REVOCATION.................................................................................................................. 13
1.0
TAX LAW.
This Practice Note applies in respect of the taxation of gains or profits derived in
conducting an investment from the realisation of an interest in land or buildings
situated in the United Republic.
2.0
3.0
INTERPRETATION.
2.1
In this Practice Note, unless the context requires otherwise “Act” means the Income Tax Act, Cap. 332.
2.2
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.
THE PURPOSE OF THIS PRACTICE NOTE
An interest in land or building is essentially an investment asset.
Realisation of interest in land or building is therefore realisation of an
investment asset, except where it is provided for otherwise in the Act,
and gains or profits derived are taxed in accordance with section
9(2)(b) of the Act.
This Practice Note considers:
3.1
Important features in determining whether or not a transaction is
considered as realisation of an interest in land or building in conducting an
investment and taxation of gains, if any, which arise from such
transactions.
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4.0
3.2
Gain from the realisation;
3.3
Conducting an investment from the realisation
3.4
Realisation not carried out in conducting an investment.
3.5
Apportionment of costs and incomings.
3.6
Mode of calculation of gains in conducting an investment from the
realisation of interest in land or building;
3.7
Mode of Payment of the tax.
HOW THE LAW APPLIES.
4.1 Gains from realisation of an asset – General rule
A person’s gain from the realisation of an asset is the amount by which
the sum of the incomings for the asset exceeds the cost of the asset at
the time of realisation.
4.1.1 Incomings for an asset of a person means amounts derived or to
be derived by a person in respect of realising the asset including:(a) Amounts derived by the person in altering or decreasing the
value of the asset; and derived while owning the asset including
by way of convenant to repair or otherwise.
(b) Amounts derived or to be derived by the person in realising the
asset.
4.1.2 The cost of an asset is the sum of
(a) expenditure incurred by the person in acquiring the
asset;
(b) expenditure incurred by the person in altering,
improving, maintaining and repairing the asset;
(c) expenditure incurred by the person in realising the asset;
(d) incidental expenditure incurred by the person in
acquiring and realising the asset;
(e) any amount required to be added in calculating income
from the investment under the Act.
4.1.3 Loss from the realisation of an asset.
A person’s loss from the realisation of an asset is the amount by
which the cost of the asset exceeds the sum of the incomings for
the asset at the time of realisation.
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4.2
Conducting an investment from the realisation of an interest in
land
or building.
A person who owns an interest in land or building (the asset) shall be
treated as realising the asset;
4.2.1 When the person parts with ownership of the asset
When a person parts with ownership of the asset including when
the asset is sold, exchanged, transferred, distributed, cancelled,
redeemed, destroyed or surrendered, the asset shall be treated as
realised. Realisation in this case is more than selling of an interest
in land or building. Realisation also occurs where the interest is
exchanged or is transferred, distributed, destroyed, cancelled,
redeemed or surrendered.
In the case of a person who ceases to exist, excluding a deceased
individual, the asset shall be treated as realised immediately before
the person ceases to exist. Therefore a deceased person who parts
with ownership of an asset consequent to death is not treated as
realising the asset.
4.2.2 Realisation of an interest in land or building by an entity
due to change in underlying ownership of the entity
At the moment the underlying ownership i.e. membership interest
owned in the entity directly or indirectly, changes by more than
fifty percent as compared with that ownership at any time during
the previous three years, the entity shall be treated as realising any
asset owned immediately before the change.
Illustration
Entities ACo Limited and BCo Limited own 70 percent and 30
percent membership interest respectively in the entity DarCo
Limited which conducts investment by leasing its two buildings
situated in Dodoma and Mwanza. A local investor InCo Limited
purchases 40 percent of ACo’s holding and 15 percent BCo’s
holding in DarCo. The new underlying ownership of DarCo Limited
is now InCo Limited 55 percent, ACo Limited, 30 percent and BCo
Limited holds. 15 percent interest. DarCo Limited underlying
ownership has changed by 55(40 + 15) percent. Pursuant to the
provisions of section 56(1) as amended, DarCo Limited is treated as
having realised its buildings immediately before the change.
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4.2.3 Special Rules of realisation
(a)
Realisation with retention of asset;
Where an interest in land or building has been realised by a
person by parting with ownerships in any of the manners
described in Sections 39(d) to (g) or for an entity due to
changes in its underlying ownership, under section 39(h):
(i)
the person or entity shall be treated as having parted
with the ownership of the asset and deriving an
amount in respect of the realisation equal to the
market value of the asset at the time of realization;
and
(ii)
the person shall be treated as reacquiring the asset
and incurring expenditure of the amount referred to
in paragraph (i) above in the acquisition.
(b)
Transfer of asset to spouse or former spouse
Where an an interest in land or building is transferred to a
spouse or former spouse on divorce settlement or bona fide
separation agreement and the spouse elect for application of
this provision to apply by written notice;
(i) the individual is treated as deriving an amount in
respect of the realisation equal to the net cost of the
asset immediately before the realisation; and
(ii) the spouse or former spouse is treated as incurring
expenditure of the amount referred to in paragraph
(i) in acquiring the asset.
(c)
Transfer of interest in land or building to an associate
or for no consideration
Where a person realises an interest in land or building by
way of transfer of ownership of the asset to an associate of
the person or by way of transfer to any other person by way
of gift(i) the person shall be treated as deriving an amount in
respect of the realisation equal to the greater of the
market value of the asset or the net cost of the asset
immediately before the realisation; and
(ii) the person who acquires ownership of the asset shall
be treated as incurring expenditure of the amount
referred to in paragraph (i) in acquiring the asset.
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Where a person realises an asset, being a business asset,
depreciable asset or trading stock by way of transfer of
ownership of the asset to an associate of the person and the
requirements of section 44(4) are met –
(i)
the person shall be treated as deriving an amount in
respect of the realisation equal to the net cost of the
asset immediately before the realisation; and
(ii)
the associate shall be treated as incurring expenditure
of the amount equal to the net cost of the asset
referred to number (a) above.
The requirements to be met under Section 44(4) are:(i) either the person or the associate is an entity;
(ii) the asset or assets are business assets, depreciable
assets or trading stock of the associates immediately
after transfer by the person;
(iii) at the time of the transfer
(i) the person and the associates are residents; and
(ii) the associate or in the case of an associate
partnership none of its partners is exempt from
income tax
(iv) there is continuity of underlying ownership in the asset
of at least 50 percent; and
(v) an election for the roll over relief is made by both the
person and associate.
The provisions of section 44(2), 44(3) and 44(4) with
respect to transfer of business assets, depreciable assets or
trading stock shall not apply to realisation of investment
assets.
(d) Involuntary realisation of an interest in land or building
with replacement
Where a person involuntarily realises an interest in land or building
in conducting an investment as provided for in section 39(a) and
within one year of the realisation acquires a replacement asset and
elects in writing for application of section 45 of the Act, the person
shall be treated as:(a) deriving an amount in respect of the realisation equal to –
(i) the net cost of the assets immediately before the
realisation; plus
(ii) the amount, if any, by which amounts derived in respect of
the realisation exceed expenditure.
(b) incurring expenditure in acquiring the replacement equal to –
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(i) the net cost of the asset immediately before the realisation;
plus
(ii) the amount, if any, by which expenditure incurred in
acquiring the replacement exceeds the amount derived in
respect of the realisation.
Illustration
Mr. M owned interest in a building which be rented to a parastatal
institution as an office of the institution.
The local authority ordered demolition of the building in order to
create more space for expansion of a trading hospital used by the
local university. Mr. T was paid Shs. 12.0 million and an alternative
plot on which he constructed a similar building for renting in eight
months. The following are the cost of the demolished buildings,
amount derived on realisation and the expenditure for the
replacement.
Net cost of the asset realised
Shs. 10,000,000.00
Percent derived on realisation
Shs. 20,000,000.00
Expenditure incurred on the replacement Shs. 24,000,000.00
Calculation of gain
(a) Amount derived in respect of the realisation
net cost of the asset realised
Shs. 10,000,000.00
plus
excess of amount derived
20,000,000
over expenditure of opinion 14,000,000
6,000,000.00
16,000,000.00
(b) Expenditure incurred
Net cost of the realised asset
10,000,000.00
Plus
Excess, if any, of expenditure
of replacement
24,000,000.00
exceeds amount derived
20,000,000.00
4,000,000.00
4,000,000.00
14,000,000.00
Gain derived (a) – (b)
2,000,000.00
(e)Realisation of interest in land or building by separation
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Except for situations of instalment sales and finance leases
administered under section 32 of the Act, where rights with
respect to an interest in land or buildings owned by one person
are created in another person, including by way of lease of an
asset or part thereof, than –
(a) Where the rights are permanent, the person shall be
treated as realising part of the asset but is not treated as
acquiring a new asset, and
(b) Where the rights are temporary or contingent, the person is
not treated as realising part of the asset but as acquiring a
new asset.
4.3
Realisation of interest in land or building not carried out in
conducting investment.
Realisation of interest in land or buildings which are subject to
single instalment under section 90(1) are only those carried out in
conducting an investment.
The following transactions are considered as realisation whose
gains are not subject to single instalment income tax for the basic
reason that the transactions are not carried out in conducting an
investment:(a)
(b)
(c)
4.4
the distribution by an entity of the investment asset to its
shareholders on its liquidation.
the distribution of the investment assets on dissolution of a
body corporate,
any transfer of assets in a scheme of amalgamation by the
amalgamating company to the amalgamated company if the
amalgamated company is a Tanzanian company.
Apportionment of costs and incomings
4.4.1 Expenditure incurred
when a person acquires one or more interest in land or buildings by
way of transfer at the same time or as put of the same
arrangement, the expenditure treated as incurred in acquiring each
of the asset shall be apportioned between the assets according to
their market values at the time of acquisition.
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4.4.2 Amounts derived
Where a person realises one or more interest in land or buildings
by way of transfer at the same time or as part of the same
arrangement, the amount derived in realising each of the assets
shall be apportioned between than according to their market values
of the time of realisation.
4.4.3 Realisation of a part of the asset
A person who owns an interest in land or building realises part of it,
the net cost of the interest or building immediately before the
realisation shall be apportioned between the realised and the
retained parts according to their market values immediately after
the realisation.
4.4.4 Interest I land and building not investment asset
The following interests in land are not investment asset by
definition in the Act:4.4.4.1 Realisation of a private residence.
Where a private residence of an individual is realised, the
gain derived as a result of the realisation of such
residence is not to be included in the gains subject to
income tax 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
(b)
The interest was realised for a gain of not more
than shillings 15,000,000.
4.4.4.2 Realisation of interest in land used for agricultural
purposes.
Where the 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 calculating gains subject to single instalment
payment under section 90(l).
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Mode of calculation of gains from realisation of interest in land
or building.
The gain from realisation of an asset is calculated as follows:
The sum of incomings of an asset from the realisation reduced by
(a)
the cost of acquisition of the interest
(b)
the expenditure incurred on any improvement to the asset
(c)
expenditure incurred wholly and exclusively in connection
with the realisation, such as stamp duty, registration
charges, legal fees, brokerage etc.
The calculation of a person’s gain from the realisation of interest in land
or buildings:
The net gain from the realisation of investment asset of a person are
calculated as the sum of an all gains from realisation of investments
assets of the investment during the year reduced by
(a) The total of all from the realisation of investment assets of an
investment during the year;
(b) any unrelieved net loss of any other investment of the person for
the year; and
(c) any unrelieved net loss for a previous year of income of investment
any other investment of the person.
Where an interest in land or buildings 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
gains on realisation of interest in land or building, the Commissioner may
adopt the fair market value of the interest against the value declared by
the Instalment payer.
4.6
Mode of payment of the tax.
4.6.1 Filing of a return
Where the person derives a gain in conducting an investment from
realisation of the interest in land or building is required to file a
return under the Act, the gain realised is to be included in the
person’s gross total income for the year of income.
4.6.2 Payment of Tax
(a) 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 at the rates shown in Paragraph
4.6.3 below.
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(b) The income tax instalment 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 instalment is payable.
(c) The single instalment payer shall be entitled to a tax credit for a
year of income equal to the amount paid by way of single
instalment.
4.6.3 Tax on gains from realisation of interest in land or building
in case of individuals.
An individual instalment payer who derives gains on realisation of
an interest in land or building shall pay income tax equal to:
(a) in the case of a resident individual, ten percent of the gain, or
(b) in the case of a non-resident individual, twenty percent of the
gain.
(c) in the case of a resident individual who derives a gain from the
realisation of interest in land or building the individual shall pay
tax as follows: (aa) the greater of –
(i)
the individual’s total income less the gains; or
(ii)
the individual’s threshold income liable to income
tax currently in force.
(bb)
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.
Example 1
Mr. Y was resident during the year 2004. He sold his personal
building, which was not used, for his residence for TZS.
40,000,000/=. The building was acquired for TZS. 15,000,000/= four
years back on which he spent TZS. 3,000,000/= on improvement and
TZS. 1,500,000/= in connection with the sale of the house. Mr. Y also
had business income of TZS. 16,000,000/= during the year.
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Capital gains tax computation
TZS
Business income
Gain on realisation:
Sale (Incoming of...)
Less: Cost
Improvement
Selling Expenses
Gain on realisation
40,000,000/=
15,000,000/=
3,000,000/=
1,500,000/=
20,500,000
Total Income
Less: Gain realised
Other Income


TZS
16,000,000/=
36,500,000/=
20,500,000/=
16,000,000/=
TZS. 16,000,000/= to be taxed at individual resident tax rates
Gain on the realisation TZS. 20,500,000 at 10 percent i.e.
single instalment tax TZS. 2,050,000/=
Example 2
Mr. M a resident individual realised gross receipt of TZS. 4,000,000/=
which he acquired three years back for TZS. 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 realization
Less: Cost of acquisition
Gain on realisation
Other income
Total income
Less TZS. 720,000 (threshold)
Taxable gains
Tax at 10% rate
TZS
4,000,000
1,000,000
3,000,000
NIL
3,000,000
720,000
2,280,000
228,000
Example 3
If Mr. N was non-resident during the year the capital gains tax would be
computed as follows:
TZS
Gross gains
4,000,000
Less cost
1,000,000
Capital gains
3,000,000
Tax at 20%
600,000
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Example 4
Mr. Z realized his house for TZS 1,8000,000/=, which he acquired for TZS.
1,000,000 few years back. During the year he had incurred business loss
of TZS. 1,000,000/=. Mr. Z had unrelieved loss of TZS. 10,000 emanated
from realization of interest in land in the previous year.
The gain on realisation will be computed as follows: TZS
Business Loss for the year
Gain on realisation:
Receipts
Less: Cost
Gain on realisation
Less: Unrelieved Capital loss
Less: Threshold
Taxable gain
Tax on gain at 10%
TZS
(1,000,000)
1,800,000
(1,000,000)
800,000
(10,000)
790,000
(720,000
70,000
7,000
4.6.4 Tax on gains on realisation of interest in land or building in case
of an entity.
Gains on realisation of interest in land or building of entities are charged
to tax at the rates of 10 percent for residents and 20 percent for nonresidents of the gains amount. However the total income of the entity is
taxed at the prevailing corporate tax rate.
5.0
REVOCATION
Pursuant to the provision of section 130(2) the Practice Note Number 02/2004
issued on 15th December, 2004 is hereby revoked.
Signed.......................
Commissioner
st
1 November, 2013.
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