Sri Lanka – Capital Gain Tax

22 June, 2018

Capital Gain Tax (CGT)

• Tax on gains realized on the transfer of ownership including sale, exchange, transfer, distribution, cancellation, redeeming, destruction, loss, expiration, expropriation or surrender of an investment asset.
• Elements of CGT
• Investment Asset
• Realization of the asset
• Cost of the asset
• Consideration

CGT = ( Consideration received – Cost of the asset at realization ) x 10%

Investment Asset

• “Investment asset” –
• means a capital asset held as part of an investment, but-
• excludes the principal place of residence of an individual, provided it has been owned by the individual continuously for 3 years before disposal, and lived-in for at least 2 of those 3 years.
• “Capital asset”– means each of the following assets:-

(i) land or buildings;

(ii) a membership interest in a company, partnership or trust;

(iii) a security or other financial asset;

(iv) an option, right or other interest in an asset referred above;

• But excludes trading stock or a depreciable asset;
• Excluded Investment Assets from CGT
  • Principal place of residence
  • Quoted shares listed in Colombo Stock Exchange
• Exempted amount from CGT
  • Resident individual’s gain from realization of an investment asset not exceeding Rs.50,000 and
  • The total gains do not exceed Rs.600,000 in the year of assessment.
• Capital Loss
  • A loss from the realization of an investment asset will not be deductible against any gain from the realization of investment asset.

Realization of Asset

• On transfer of ownership of an asset (including when the asset is sold, exchanged, transferred, distributed, canceled, redeemed, destroyed, lost, expired, expropriated or surrendered) to a spouse;
• Ceasing of the person owning the asset, including death;
• When a debt claim is being written off as bad by the person;
• When the person begins to employ trading stock, a depreciable asset, a capital asset of a business or an investment asset, in such a way that it ceases to be an asset of any of those types;
• When a person resident in Sri Lanka ceases to be resident in Sri Lanka, all assets owned by the person is deemed to be realized;

Special cases

• Transfer on death
  • Consideration on realization = Cost of asset
• Transfer to spouse as part of divorce settlement or bona fide separation
  • Consideration on realization = Cost of asset
• Transfer to ‘associate’ or gift
  • Consideration on realization = Cost of the asset / Market Value, whichever is higher
• Transfer of land or building to ‘associate’ of an individual or charitable institution
  • Consideration on realization = Cost of the asset
• Assignment of rights & obligations over an asset for more than 50 years (including by way of lease)
• Transfer by way of finance lease/ instalment sale (hire purchase)

Cost of the Asset

The cost of an investment asset held by a person as at 30th September 2017 is equal to the market value of the asset at that time.

• Expenditure incurred in acquiring the asset including expenditure on construction, manufacture or production of the asset;
• Expenditure incurred in altering, improving, maintaining or repairing the asset;
• Incidental expenditure incurred in acquiring and realizing the asset;

(a) advertising expenditure, transfer taxes, duties and other expenditure of transfer;

(b) expenditure of establishing, preserving or defending ownership of the asset; and

(c) remuneration for the services of an accountant, agent, auctioneer, broker, consultant, legal advisor, surveyor or valuer relating to above expenses.

The cost of an asset shall not include consumption expenditure, excluded expenditure and expenditure to the extent to which it is deducted in calculating a person’s income or included in the cost of another asset.

Payment and Filing obligation

• Due Date for Payment of Tax :
  • Not later than one month after the date of realization of investment asset.
• Due Date for Furnish Returns :
  • Not later than one month after the date of realization of investment asset.

Submit to :

• The relevant Inland Revenue Metropolitan/Regional Office
• Central Document Management Unit (CDMU) of the DIR

Penalty

• Default in payment
  • CGIR issues a Notice of default
  • If payment is not made within 21 days from the date of Notice of Default, penalty of 20% will be imposed and legal action will be instituted.
• Failure to submit return
  • Penalty of 5%, and 1% for each month in default, OR
  • 50,000, and Rs. 10,000 for each month in default, whichever is higher
  • Penalty is limited to Rs. 400,000.

For further information, please contact:

Savantha De Saram, Partner, D.L.&F. De Saram.

savantha@desaram.com