Capital Gains Tax in Sri Lanka: Impact on Property Investments

What is Capital Gains Tax?

The Capital Gains Tax (CGT) is a tax on the profit from the sale of property or investment assets, recently re-introduced in Sri Lanka under the Inland Revenue Act, No. 24 of 2017. Effective from April 1, 2018, this tax is set at 10% of the profit. It takes into account the costs incurred in buying, improving, and selling the assets. Capital assets include land, buildings, machinery, and shares, though gains from the share market are exempt under this Act.

What is an Investment Asset?

An investment asset includes capital assets such as land, buildings, and financial assets held as part of an investment.

Exemptions from CGT

• Principal residence owned for the last 3 years and lived in for at least 2 of those years.
• Profits less than Rs. 50,000 per month and total annual profits under Rs. 600,000.
• Jointly owned investment assets.
• Property or land gifted to blood relations.
• Trading stock or depreciable assets.
• Transfers to spouses, ex-spouses, charities, or the government.

How is the Cost Calculated?

The cost of the investment asset is based on its value as of September 30, 2017. If acquired after this date, the cost is based on the acquisition cost.

How is the Capital Gain Calculated?

Example:

• Land purchased on January 10, 2010: Rs. 10,000,000
• House built on land in 2012: Rs. 15,000,000
• Market value as of September 30, 2017: Rs. 32,000,000
• House renovation on December 1, 2017: Rs. 1,000,000
• Land and house sold on October 1, 2018: Rs. 35,500,000
• Property advertising, valuation, and legal costs: Rs. 400,000

Calculation:

• Cost (including improvements and incidentals): Rs. 33,400,000
• Capital gain: Rs. 35,500,000 – Rs. 33,400,000 = Rs. 1,600,000
• CGT to be paid: 10% of Rs. 1,600,000 = Rs. 160,000

When is an Asset Deemed Realised?

• Receipt of cash or consideration other than cash.
• Transfer of ownership (sale, exchange, distribution, transfer).
• Death of an individual.
• Lease, write-off, or change of residence.

Transfer of an Asset

The acquisition cost to the acquirer will be the net cost as of September 30, 2017, or the cost of acquisition after April 1, 2018.

Example:

• A buys land for Rs. 5,000,000.
• Land value as of September 30, 2017: Rs. 6,000,000.
• B sells land on December 30, 2018, for Rs. 7,500,000.
• Taxable capital gain: Rs. 7,500,000 – Rs. 6,000,000 = Rs. 1,500,000.

Payment and Filing of CGT

Submit the CGT return and pay the tax within one month of realizing the investment asset.

Can CGT Be Set Against Losses?

No, CGT cannot be set off against capital losses.

Announcement and Reason for Implementation

The Sri Lankan government introduced CGT in the 2017 budget speech, aiming to raise tax revenue and benefit from the increased property prices due to infrastructure spending.

Other Applicable Taxes

A stamp duty of 4% is applicable on the transfer of property.

Effect on the Sri Lankan Property Market

The CGT implementation has received mixed reactions. Some see it as necessary, while others are concerned about its unclear nature and retrospective power. The announcement has led to foreign investors selling significant assets.

Further Questions

For more details, refer to the Inland Revenue Act, No. 24 of 2017, or contact us at Colombo Realtors for professional advice.