Beginning April 1st this 2018, the Sri Lankan government will start collecting a mandatory Capital Gains Tax (CGT) on realised investments, which include sales of property among other taxable assets. The reintroduced law is now rolling out and is projected to impact on the country’s property market, therefore directly affecting industry stakeholders – Sri Lankan nationals and foreigners alike.
How exactly the CGT will play out has been pretty much defined, as embodied in Sri Lanka’s Inland Revenue Act, No. 24 of 2017, but to be in the know of the essential provisions of the law, this article attempts to provide simple answers on some of the frequently asked questions.
To Whom The CGT Applies To?
As mentioned, Sri Lanka intends to levy the tax on its nationals and legal residents alike, the latter obviously covers all foreigners living and making business in the country. Properties of these individuals will be subject for the re-enacted tax provided the assets were acquired within the prescribed 10-year period of the Act or specifically, profits have been gained on the assets resulting from a completed sales deal.
Of note, the CGT takes effect on top of the usual four percent stamp duties that Sri Lankan land owners are required to pay during the process of registering deed ownerships.
When Is CGT Applicable?
The CGT will immediately kick in following the realisation of an investment asset, which the law defined as the sale of capital asset (land, building, machinery or shares). This means that taxpayers will need to file the CGT return within a month after a completed business deal and transmit the corresponding payable amount.
How Much To Pay?
The CGT law is clear – 10 percent will be imposed on the profits of a specific transaction. For example, if a property was sold for $1 million and the seller cleared $100,000 on the deal, the taxable amount to be collected will total to $10,000.
What Are Cost Discounts
The good news for property owners is that the CGT takes into consideration the direct and incidental costs that were incurred during the period of ownership and the process selling. A house, for instance, with an original or purchase value of $1 million but was refurbished at cost of $500,000 will get a sizeable reduction on the tax dues, which is equal to the total amount of home improvements or renovations over the course of ownership. In this case, it will be $500,000.
In addition, home owners/sellers can deduct from the CGT dues the marketing and legal costs of selling their property. That means an additional of $100,000, for example, can be discounted from the total tax payable.
However, it should be noted that the CGT cannot be set off against the loss of a capital asset.
Will There Be Exemptions From CGT?
Apart from the discounts discussed above, the law also specified exemptions or cases that the CGT need not apply. Per LankaPropertyWeb.com, they are the following:
- The principle place of residence that is owned and occupied in the last three years
- When the profit or gain is less than 50,000 (in local currency) or less than 600,000 garnered within a year and through multiple gains
- Investment assets acquired in multiple instances
- Realised investment asset that is jointly owned
- A property or land gifted to blood relations
- Trading stock or depreciable asset
To be clear though, the legal transfer of an asset is covered by the CGT and the tax dues will be based the net or cost of acquisition for the same asset.
How Exactly The CGT Will Impact On The Sri Lankan Property Market?
It remains unclear what effects the new law will bring upon the rising property market of Sri Lanka. Some of the concerns raised include the deliberate slowdown of asset turnovers just to dodge the CGT tax duties, the undue haste in liquidation of assets by foreign owners to skirt over the law and the likelihood of the tax getting implemented with retrospective provisions. The latter would mean tax dues on properties that were developed and built prior to the CGT re-enactment.
These, however, are in the speculative zone for now and will be clarified once the Sri Lankan government issues the CGT law’s implementing rules and regulations.
At the moment, the bottom line is the CGT is already in effect, enacted by Sri Lanka to generate additional domestic revenues in support of the country’s ongoing economic expansion. It is estimated that the reinstated tax scheme will deliver some $US 3 billion to the national treasury.