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The Conundrum of Capital Gains and its Implications in Jamaica

The principal objectives of taxation are to raise revenues by governments, redistribute wealth and by extension to stimulate economic growth within a country. In achieving these objectives, the system that is earmarked to collect taxes should be developed in an equitable manner in its quest of stabilising the economy. Tax evasion and avoidance have significant effect on developing counties such as Jamaica due to gaps which might exist in the aforementioned taxation policies. On of such gaps culminate from gains earned from capital investments. Currently, aspects of capital gains in Jamaica are assessed under the Transfer Tax Act and the Income Tax Act.

Capital Gains on Properties

Capital gains culminate from the sale of long term assets in excess of their tax or cost bases. Currently, the disposal of properties in Jamaica attracts transfer tax on the market value—after applying various reliefs and exemptions applicable under the Transfer Tax Act– at a rate of 2% or 1.5% if relates to transfers executed after the death of the transferor. Property under the Transfer Tax Act entails land, lease of land, securities and/or beneficial interest in the aforementioned. However, transfer taxes are restricted to 37.5% of capital gains on the said properties transferred. Capital gains on securities such as stocks are more complicated.

The transfer of taxes on the transfer of shares traded on the Jamaica Stock Exchange (JSE) is relieved from transfer tax. However, capital gains on shares not traded on the JSE are taxed at 25%, but any gains realised on shares traded on the JSE may be exempt from income taxes provided that the taxpayer realising these gains is not a dealer in stocks, otherwise the gains would be taxable. If the individual or entity is not a dealer or trader in stocks, but profits or gains from the capital appreciation of stock prices held by the taxpayer exceeds one-half of the taxpayer’s statutory income from all other sources for the year of assessment, then the gains or profits realised are taxable at 25%. If gains are unrealised, then there are no exposure to income taxes until the shares are sold.

The Income Tax Act also permits the taxpayer the ability to elect and carry forward current year gains to aggregate with gains and losses of the two immediate preceding years of assessment, which could be used as an effective tax planning methodology. Reason being, even if  gains exceed one-half of the statutory income from all other source for the current year of assessment, aggregating with losses and gains from the two immediate preceding years of assessment might not exceeds one-half of statutory income from other sources of the identical three year period being aggregated. Failure to exceed, would result in gains being relieved of income tax.

Treatment of Capital Gain on Other Long Term Asset

The disposal of other capital items such as motor vehicle, artwork as well as plant and machinery are not subjected to transfer taxes nor do they attract capital gains tax as there is none in Jamaica, but these might be subjected to the provisions of income tax where the sale proceeds of the same exceed the their written down values. The excess which is termed a ‘balancing charge ‘ in accordance with the Income Tax Act is also subjected to restrictions, as the total balancing charge that is to be brought into the income tax computation and taxed, should not exceed the total capital allowances claimed over the life of these assets.

Balancing charge is a similar concept to capital gains, but is subjected to the rate of income tax. In the event that the aforementioned assets disposed are not deemed trading assets, then even if a capital gain is realised, it could be difficult to bring these capital gains under the charging provisions of the income tax act if the entity was not conducting a trade, business, profession or a vocation in accordance with Income Tax Act. However, if these assets are disposed of in the ordinary course of the entity’s business, these would have been classified as inventories and therefore would be brought into the taxpayer’s income tax computation.

Recommendations

Taxation policies are one avenue to stimulate wealth, induce foreign direct investment and needy capital flows into developing countries such as Jamaica. Hence, it is imperative that local policymakers address the disparities, inequity and complexities that are associates with the current treatment if capital gains. It is advise that the government should adopt a robust capital gain policy that eliminates the current connumdrum which exist and implement one that is similar to the United States where long term capital gains are taxes at a more favourable rate and taxpayers who realise short term capital gains are taxed at a higher rate if it to benefit from long term investments. It is envisage that while this might not be panacea to all the countries current economic problems that exists in Jamaica, it may provide a catalyst to the much needy foreign direct investment and capital flows which will be pivotal to stimulate future economic growth.

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