How new Finance Act will impact real estate, by experts

Professionals have said that the Finance Act 2022 is a blessing in disguise for the real estate industry, as it will provide leeway for real estate investors to explore relevant incentives and reduce tax burdens to grow their investments.

The President Muhammadu Buhari assented to the 2021 Finance Bill, thereby introducing the 2021 Finance Act, effective January 1, 2022. The Act made changes to 12 laws, including Companies Income Tax Act, Personal Income Tax Act, Capital Gains Tax Act, Stamp Duties Act, Tertiary Education Trust Fund (Establishment]) Act, Value Added Tax Act, Insurance Act, National Agency for Science and Engineering Infrastructure Act.

According to Wole Obayomi of KPMG Nigeria, the Act updates some of the amendments introduced in the previous Finance Acts and introduces additional changes to several existing tax laws and other legislations.

Key highlights listed by Obayomi include restriction of capital allowance claimable by a company that earns both taxable and tax-exempt incomes, where the tax-exempt income is greater than 20 per cent of taxable income in any year of assessment. The capital allowances computed on qualifying assets used in generating both taxable and tax-exempt incomes will be prorated and only the portion relating to the taxable income will be allowed as capital allowance deduction against the assessable profit of the company.

“ The resolution of the hitherto impossible tax position of unit trusts and Real Estate Investment Trusts (REITS), to incentivise investment in such business structures that are currently serving as capital aggregation platforms under the SEC’s regulatory oversight,” he said.

Specifically, REITS and Unit Trusts will now operate as pass-through vehicles for tax purposes. This will help to ease the administration of these vehicles for the benefit of investors and the capital markets.

Clarification of companies liable to the National Agency for Science and Engineering Infrastructure levy of 0.25 per cent of profit before tax. Affected companies include companies operating in the banking, mobile telecommunication, ICT, oil and gas, aviation, and maritime companies with turnover of ₦100,000,000 and above.

Introduction of 10 per cent Capital Gains Tax (CGT) rate on the gains from disposal of shares in any Nigerian company where the gross proceeds from such sales in any 12 consecutive months exceed ₦100million – except where the proceeds are reinvested in shares of the same or other Nigerian company within the same year of assessment. However, gains from transfer of shares in a Securities and Exchange Commission (SEC)’s regulated securities lending transaction are exempt from CGT.

The Senior Partner and Chief Executive Officer, Knight Frank Nigeria, Mr. Frank Okosun, explained that the essence of the Act is to increase its revenue generation. “The FG is struggling to meet its obligation in terms of capital and recurrent expenditure, therefore they are exploring ways to increase the revenue generated for Nigeria’s growth. The act impacts different sectors either positively or negatively, just depends on the divide you are on.

“This does not affect the real estate sector. It is expected that with the new act, investors will take advantage of the amendments particularly in the Capital Gains Tax Act (CGTA) as well as the tax benefits in the Company Income Tax Act (CITA) to further boost investments in the sector.

He said: “The financial act does not hamper growth and development of the sector. On the contrary, it has created a leeway for real estate investors to explore relevant tax incentives and reduced tax burdens to grow their investments.”

Okosun advised companies to engage tax consultants to assist in the analysis of the provisions of the Act to better understand how they can take advantage of it.

For the Vice Chairman, Lagos branch, Nigerian Institution of Estate Surveyors and Valuers (NIESV), Mr. Gbenga Ismail, said the CGT and Capital allowance on assets are indirect amendments that may impact real estate.

Ismail, who doubles as the Vice President, Lagos Chamber of Commerce and Industry (LCCI), said: “It will not slow down development at moment, the most impacting amendment previously was removal of VAT on real estate transaction.”

The Managing Director, NISH Affordable Housing Limited, Dr. Yemi Adelakun, noted that REITs provision under the Act are essential for equity and fixed income portfolios and promotes diversification, higher returns with shared risks in construction and property development.

“The provision of the Finance Act 2021 aimed at facilitating the growth of REITs is a step in the right direction with great prospects for real estate development in Nigeria.

“This has the potential of attracting much needed private equity funding to the real estate sector from both domestic and international markets as opposed to the current high cost debt funding.”

Adelakun explained that funding housing needs through equity-based innovation could provide the best solution to Nigeria’s liquidity crisis in housing. For example, Public-Private Equity (PPE) offers the prospect of a more stable funding than debt based financing and has the capacity to deliver to scale in a sustainable manner.

According to him, “all housing sector stakeholders whether public or private, can become shareholders in a construction project or bundle of projects by investing in a Special Purpose Vehicle (SPV) approved by the Security Exchange Commission.

However, he disclosed, “this provision is however a far cry from the coordinated policy measures required transforming real estate sector and delivering affordable housing to the generality of Nigerians.

“This and similar uncoordinated initiatives are unable to address some deep-rooted problems in the real estate sector especially high interest and inflation rates as well as short term debt that are unsuitable for long term real estate development and funding needs.