CAPITAL GAIN TAX
FREQUENTLY ASKED QUESTIONS
5.
What is Capital Gains Tax (CGT)?*
1.
Who is liable to pay the tax? *
Capital Gains Tax is a tax chargeable on the whole of a gain which
accrues to a company or an individual on or after 1st January, 2015 on
the transfer of property situated in Kenya, whether or not the property
was acquired before 1st January,
2015.
The tax is to be paid by the person (resident or non-resident) transferring
the property, that is, the transferor. The transferor can either be an
individual or a corporate body.
6.
Pursuant with paragraph 6 (1) of ITA a transfer takes place: 2.1. where a property is sold, exchanged, conveyed or disposed
of in any manner whatsoever (including by way of gift),
whether or not for consideration; or
2.2. on the occasion of loss, destruction or extinction of
property whether or not compensation is received; or
2.3. On the abandonment, surrender, cancellation or forfeiture of,
or the expiration of rights to property including the surrender
of shares or debentures on the dissolution of a company.
Is CGT a new tax?
It is not a new tax. It was first introduced in Kenya in 1975 but later
suspended in 1985 and has now been re-introduced effective 1st
January, 2015.
7.
Why was the tax suspended in 1985?
The tax was suspended then to encourage and incentivise investments
in the Stock Market and real estates which was less vibrant.
8.
9.
What are some of the cited justification for the CGT tax?
8.1. Equity and fairness in fiscal policy in line with the new
constitution.
8.2. Economic efficiency as investors are drawn to invest in CGT
related assets than Income Tax related assets
8.3. Minimisation of misallocation of investments resources due
to non taxed capital gains
8.4. Minimisation of tax avoidance and tax evasion
2.
What constitutes a transfer? *
3.
What constitutes transfer value?
The amount of value of the consideration for the transfer of
investment shares (less any amount which would be deductible
under paragraph 10 of Part I of the Eighth Schedule)
4.
How do you determine the net gain? *
The net gain is the excess of the transfer value over the adjusted cost of
the property that has been transferred. It is this excess that is subjected
to tax at 5%.
What is the rate of tax for CGT? *
The rate of tax is 5% of the net gain. It is a final tax and cannot be offset
against other income taxes.
10. What is Property? *
Property is defined in the law (Eighth Schedule to the Income Tax Act).
It includes land, buildings and marketable securities.
11. What is a Marketable Security?
“marketable security” includes a security capable of being sold and
stock as defined in section 2 of the Stamp Duty Act (SDA)
The Transfer value of the property is the amount or value of
consideration or compensation for transfer of the property less
incidental costs on such transfer.
The Adjusted cost is the sum of the cost of acquisition or construction
of the property; expenditure for enhancement of value and/or
preservation of the property; cost of defending title or right over
property, if any; and the incidental costs of acquiring the property.
The adjusted cost shall be reduced by any amounts that have been
previously allowed as deductions under Section 15(2) of the Income
Tax Act.
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CAPITAL GAIN TAX
FREQUENTLY ASKED QUESTIONS
16. What happens in case where no amount is ascertainable on
transfer value of the property?
Pursuant with paragraph 7 (3) of the Eighth Schedule of ITA the transfer
value of the property shall be deemed to be market value subject to
Commissioner confirmation.
17. What will be the adjusted cost of marketable securities when I
am issued with bonus shares?
Pursuant with paragraph 8 (3) of the Eighth Schedule of the ITA the
shareholder shall adjust the cost of his existing shares between the old
shares and the new shares. Given that bonus shares are issued for free
the costs will be nil (zero). That is, CGT will be applicable to net
realisable amount which is the sale proceeds less adjusted costs.
12. How is the tax to be declared? *
The taxpayer will do a self-assessment to determine the gain upon
which tax is computed. The computations are subject to
Commissioner’s confirmation of correct gain as the basis of tax
computation.
Upon transfer of property the transferor shall complete the relevant
form (CGT 1) as appropriate and compute and pay the tax thereon.
KRA has indicated that it is developing a specific form (Form CGT 2)
for declarations relating to Marketable Securities.
13. What happens when a loss is made? *
18. What will be the adjusted cost of marketable securities when I
am issued with rights shares?
The loss may be carried forward to be offset/deducted against a gain of
a similar nature (that is, a capital gain) at a future date.
Pursuant with paragraph 8 (3) of the Eighth Schedule of the ITA the
shareholder shall adjust the cost of his existing shares between the old
shares and the new shares. Given that rights issue shares are issued at a
cost normally lower than the existing shares though they rank parri
passu with the older shares and are subject to exercise by the
shareholder, the costs will be sum paid for the rights issues shares
allotted including incidentals costs therein.
14. Is PIN required for transmission of CGT?
19. How will related party transactions be treated? *
This is in accordance with paragraph 1 (3) of the Eighth Schedule of the
ITA.
Two parties are related if:19.1. Either person participates directly or indirectly in the
management control or capital of business of the other; or
19.2. A third person participates directly or indirectly in the
management control or capital of business of both.
Where there is concern that a related party transaction may have led to
reduction in the transfer value with a view to minimizing the capital
gains tax, the Commissioner will make necessary adjustments and/or
revaluation to determine the market price
An investor must provide a certified copy of a PIN to the tax agent or
the stockbroker with which if the tax is deducted at source the broker
shall include in the CGT Form 2 during submission to KRA.
15. What documents/information will be required? *
15.1. Completed CGT form by the seller.
15.2. Copy of Sale/Transfer Agreement of the property.
15.3. Proof of the incidental costs related to the acquisition and
transfer of the property.
15.4. A copy of the title deed or ownership document for the
property
15.5. Report from a registered valuer for property transactions
between related parties
15.6. Any other document/information that the Commissioner
may require
20. What is the due date/ tax point? *
It is a transaction based tax and should therefore be paid upon transfer
of property but not later than the 20th day of the month following that
in which the transfer was made.
21.
12. What happens in case where no amount is ascertainable
on transfer value of the property?
Pursuant with paragraph 7 (3) of the Eighth Schedule of ITA the transfer
value of the property shall be deemed to be nil (zero).
13. What will be the adjusted cost of marketable securities
when I am issued with bonus shares?
NB:8*Adopted
fromSchedule
KenyaofRevenue
Pursuant with paragraph
(3) of the Eighth
the ITA theAuthority
shareholder shall adjust the cost of his existing shares between the old
shares and the new shares. Given that bonus shares are issued for free
the costs will be nil (zero). That is, CGT will be applicable to net
realisable amount which is the sale proceeds less adjusted costs.
guidelines
2
CAPITAL GAIN TAX
FREQUENTLY ASKED QUESTIONS
24. Are there any exemptions from capital gains tax? *
Pursuant with Paragraph 13 of the Eighth Schedule of ITA certain
transactions are exempted as follows: 24.1. Transfer of property for the purpose only of securing a debt
or a loan or on a transfer by a creditor for the purpose only
of returning property used as a security for a debt or a loan;
24.2. income that is taxed elsewhere as in the case of property
dealers;
24.3. issuance by a company of its own shares and debentures;
24.4. transfer of machinery including motor vehicles;
24.5. disposal of property for purpose of administering the estate
of a deceased person;
24.6. vesting of property in the hands of a liquidator or receiver;
24.7. transfer of individual residence occupied by the transferor
for at least three years before the transfer;
24.8. compensation by Government for property acquired for
infrastructure development;
24.9. transfer of asset between spouses as part of divorce
settlement;
24.10.
sale of land by an individual where the proceeds is
less than Kshs. 30,000;
24.11.
sale of agricultural land by individuals outside
gazetted townships where the property is less than 100 acres
24.12.
Exchange of property necessitated by :
incorporation, recapitalization, acquisition, amalgamation,
separation, dissolution or similar
24.13.
restructuring involving one or more companies
which is certified by the Cabinet Secretary to have been done
in the public interest
24.14.
transfer of investment shares by a body exempted
under Paragraph 10 of the First Schedule
24.15.
transfer of investment shares by pension fund, trust
scheme, or retirement benefits scheme registered with
Commissioner
24.16.
transferor of investment shares in an
unincorporated association or body of individuals of a public
character exempted from income tax under paragraph 10 of
First schedule of ITA.
24.17.
Unit trusts and Collective Investment Schemes
under section 20 of ITA.
25. What are investment shares?
This means shares of companies, municipal or Government
authorities or a body created by those authorities, that are listed
and traded on the Nairobi Securities Exchange.
22. Where can I access information on CGT?
22.1. Guidelines on Kenya Revenue Authority (KRA) website
(www.kra.go.ke)
22.2. Contacting KRA customer center
22.3. Public notices
22.4. You tax advisors or agents
23. Scenario 1
23.1. Question 1(acquisition and disposal of shares after 1 st
January, 2015)
A client buys 1,000 Safaricom shares on 2nd January, 2015 at Kshs.
12.50 and sells those shares on 15th January, 2015 at Kshs. 15.15.
Compute the applicable CGT payable to KRA by the client. By
what deadline must the tax be submitted to KRA.
23.2. Answer 1
Sales proceeds:
A) Consideration (1,000X15.15)
B) Transaction fees* (2.1%X(A
above))
C) Stamp duty ((A/10000)X2.00)
15,150.00
318.15
4.00
D) Other costs related to the
transaction (e.g specific legal
costs provided not deducted
under Section 15 (2) of ITA)
100.00
E) Total incidental costs (B+C+D)
422.15
F) Total Transfer Value
14,727.85
Less Adjusted Acquisition cost:
G) Consideration (1,000X12.50)
H) Transaction fees* (2.1%X(G
above))
I) Stamp duty ((G/10000)X2.00)
12,500.00
262.50
4.00
J) Other costs related to the
transaction (e.g. specific legal
costs provided not deducted
under Section 15 (2) of ITA)
100.00
K) Total incidental costs (H+I+J)
366.50
L) Total adjusted costs (G+K)
26. Who is the tax collecting agent of CGT?
As of now KRA is yet to clarify the collecting tax agent. KRA
guidelines on one hand indicate that the tax payer in this case the
investor will self-assess tax and pay the same to KRA
contradicting paragraph 18 and 20 of Part II of the Eighth Schedule
of ITA as read with section 35(5) of ITA.
12,866.50
M) Capital Gain (F-L)
1,861.35
th
CGT (5% of M must be paid to KRA by 20 February, 2015)
93.07
NB: *Adopted from Kenya Revenue Authority guidelines
3
CAPITAL GAIN TAX
FREQUENTLY ASKED QUESTIONS
26.1.
28. Scenario 2 (irrelevance of acquisition date after 1 st January,
2015)
28.1. Question 2
A client buys 1,000 Equity Bank shares on 2nd September, 2014 at
Kshs. 50.00 and sells those shares on 15th January, 2015 at Kshs.
55.50. Compute the applicable CGT payable to KRA by the client.
By what deadline must the tax be submitted to KRA.
28.2. Answer 2
The acquisition date of these shares being 2nd September,
2014 (before 1st January, 2015) is irrelevant. What is
relevant is the acquisition cost. See below computation.
Sales proceeds:
A) Consideration (1,000X55.50)
B)
Transaction
(2.1%X(A above))
C)
Stamp
((A/10000)X2.00)
55,500.00
fees*
27. Scenario 3 (effect of bonus shares issued before or after 1st
January, 2015)
27.1. Question 3
A client buys 1,000 CIC shares on 2nd March, 2014 at Kshs. 7.10
and sells those shares on 15th January, 2015 at Kshs. 12.20. On 12th
March, 2014 CIC declared a bonus share of 1share for every 5
shares held at the closure of books on 24th June, 2014. On 11th of
August, 2014 the client was allocated the bonus shares which are
also sold on 15th January, 2015. Compute the applicable CGT
payable to KRA by the client. By what deadline must the tax be
submitted to KRA.
27.2. Answer 3
By virtue of paragraph 8 (3) of the Eighth Schedule of ITA,
bonus shares suffer the full blunt of CGT on their net sale
proceeds.
Sales proceeds:
1,165.50
duty
Bonus shares allocated
shares=500+1,000=1,500
12.00
(1,000/5)=500.00;
New
A) Consideration (1,500X12.20)
D) Other costs related to the
transaction (e.g. specific legal
costs provided not deducted
under Section 15 (2) of ITA)
B) Transaction fees* (2.1%X(A
above))
100.00
C) Stamp duty ((A/10000)X2.00)
E) Total incidental costs (B+C+D)
1,277.50
F) Total Transfer Value
54,222.50
D) Other costs related to the
transaction (e.g. specific legal costs
provided not deducted under Section
15 (2) of ITA)
number
of
18,300.00
384.30
4.00
100.00
Less Adjusted Acquisition cost:
E) Total incidental costs (B+C+D)
G) Consideration (1,000X50.00)
H)
Transaction
(2.1%X(G above))
I)
Stamp
duty
/10000)X2.00)
50,000.00
fees*
1,050.00
G) Consideration before bonus
(1,000X7.10)
H) Transaction fees* (2.1%X(G
above))
10.00
I) Stamp duty ((G /10000)X2.00)
100.00
incidental
J) Other costs related to the
transaction (specific legal costs
provided not deducted under Section
15 (2) of ITA)
costs
1,160.00
L) Total adjusted costs (G+K)
M) Capital Gain (F-L)
CGT (5% of M)
17,811.70
Less Adjusted Acquisition cost:
((G
J) Other costs related to the
transaction (e.g. specific legal
costs provided not deducted
under Section 15 (2) of ITA)
K) Total
(H+I+J)
488.30
F) Total Transfer Value
51,160.00
3,062.50
153.13
K) Total incidental costs (H+I+J)
L) Total adjusted costs (G+K)
M) Capital Gain (F-L)
CGT (5% of M)
7,100.00
149.10
2.00
100.00
251.10
7,351.10
10,460.60
523.03
NB: *Adopted from Kenya Revenue Authority guidelines
4
CAPITAL GAIN TAX
FREQUENTLY ASKED QUESTIONS
30. Scenario 4 (effect of rights issue shares issued before or after
1st January, 2015)
30.1. Question 4
A client buys 1,000 DTK shares on 18th June, 2014 at Kshs. 244
per share and sells those shares on 15th January, 2015 at Kshs. 300.
On 19th June, 2014 DTK declare a rights share of 1share each at
Kshs. 165 for every 10 shares held at the closure of books on 24th
June, 2014. The client exercise the rights. On 26th of August, 2014
the client is allocated the rights shares which are also sold on 15th
January, 2014. Compute the applicable CGT payable to KRA by
the client.
30.2. Answer 4
By virtue of paragraph 8 (3) of the Eighth Schedule of ITA,
the consideration for Rights Issues shares is consider in
computation of the adjusted costs.
Sales proceeds:
Rights Issue shares allocated (1,000/10)=100.00; New number of
shares=100+1,000=1,100
330,000.00
A) Consideration (1,100X300)
B)
Transaction fees*
(2.1%X(A above))
C)
Stamp
duty
((A/10000)X2.00)
D) Other costs related to the
transaction (e.g. specific
legal costs provided not
deducted under Section 15
(2) of ITA)
6,930.00
66.00
B)
Transaction fees*
(2.1%X(A above))
C)
Stamp
duty
((A/10000)X2.00)
D) Other costs related to the
transaction (e.g. specific legal
costs provided not deducted
under Section 15 (2) of ITA)
256.20
4.00
100.00
360.20
11,839.80
Less Adjusted Acquisition cost:
7,096.00
322,904.00
Less Adjusted Acquisition cost:
CGT (5% of N)
12,200.00
A) Consideration (1,000X12.20)
F) Total Transfer Value
100.00
F) Total Transfer Value
N) Capital Gain (F-M)
Sales proceeds:
E) Total incidental costs (B+C+D)
E) Total incidental costs (B+C+D)
G)
Consideration before
rights issue (1,000X244)
H) Consideration for the
rights
issue
((1,000/10)X165)
I)
Transaction fees*
(2.1%X(G above))
J)
Stamp
duty
((G/10000)X2.00)
K) Other costs related to the
transaction (e.g. specific
legal costs provided not
deducted under Section 15
(2) of ITA)
L) Total incidental costs
(I+J+K)
M) Total adjusted costs
(G+H+L)
29. Scenario 5 (effect of rights issue shares issued before or after
1st January, 2015)
29.1. Question 5
A client inherits 1,000 Safaricom shares which are transferred to
his/her account on 19th December, 2014 through the process
known as Private Transfer. The client sells these shares on 15th
January, 2015 at Kshs. 12.20 per share. Compute the applicable
CGT payable to KRA by the client.
29.2. Answer 5
By virtue of paragraph 8 (3) of the Eighth Schedule of ITA,
the consideration for the inherited shares shall face the full
blunt of the CGT as they are acquire free from the transferor.
K) Other costs related to the
transaction (e.g. fees charged
on transfer provided not
deducted under Section 15 (2)
of ITA)
L) Total incidental costs (K)
244,000.00
16,500.00
3,000.00
3,000.00
M) Total adjusted costs (L)
3,000.00
N) Capital Gain (F-M)
8,839.80
CGT (5% of N)
441.99
5,124.00
50.00
100.00
5,274.00
265,774.00
57,130.00
2,856.50
NB: *Adopted from Kenya Revenue Authority guidelines
5
NB: *Adopted from Kenya Revenue Authority guidelines
6