Monday, October 7, 2013

To Tax or Not - The Capital Gains Conundrum

In a recent article in the Business Daily the writer argues for re-introduction of CGT (See article) giving illustrations of situations where the current legislation disproportionately benefits the wealthy. In one example he described a taxpayer who had a 'side-hustle' buying and selling land, earning income which apparently wouldn't be taxed because the gains would be considered under CGT. I disagree with this on the basis that the side-hustle amounts to trading and income derived from it will be taxed in the normal way. The differentiator is that the plots he was buying and subdividing were bought primarily for that purpose a fact which would be easily established by KRA if they were to catch up with him. If for example he had bought that plot years ago, perhaps planning to build a home on it sometime in the future
and then one day he had to sell it to meet some obligation. Any gain he made on the sale over what he paid for it would fall squarely under the umbrella of CGT. The circumstances are clearly different from the earlier example.
In another example, the writer told of an investment group that invested in a sizeable chunk of land with a view to selling it in the future for a profit. The writer argues that the gain would once again be subject to zero CGT. Since he made no mention of similar investments the chama had made I will assume this was a one-off deal and accept that any gains would perhaps be free of tax. My feeling however is that the tax treatment will depend on how the chama is structured. If for example the chama was a limited liability company then the tax free capital gain will be earned by the company but the taxman would still catch up with the shareholders when the company attempts to distribute the profits as dividend or otherwise i.e. an animal called compensating tax kicks in when an entity attempts to distribute untaxed income.

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