Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
OVERVIEW
1. Difference between Ordinary Assets and Analysis of Properties held by the taxpayer
Capital Assets
2. Analysis of Properties held by the taxpayer
3. Classification of Assets
4. Types of Gains on Dealings in Properties
5. Capital Gains Subject to CGT
6. Taxation of Gains on Dealings in
Properties
7. Scope of Capital Gains Taxation
Ordinary Assets
- Stock in trade of a taxpayer or other
property of a kind which would properly Asset Classification is Relative
be included in the inventory of a taxpayer
if on hand at the close of the taxable year. The classification of assets or properties as
- Property held by the taxpayer primarily ordinary asset or capital asset does not depend
for sale to costumers in the ordinary upon the nature of the property but upon the
course of his trade or business. nature of the taxpayer’s business and its usage
- Property used in the trade or business, of a by the business.
character which is subject to the allowance
for depreciation. Types of Gains on Dealings in Properties
- Real property used in trade or business of
the taxpayer. 1. Ordinary gain – arises from the sale,
exchange and other disposition including
Basically, ordinary assets are: pacto de retro sale and other conditional
sales of ordinary assets.
Assets held for sale – such as inventory. 2. Capital gain – arises from the sale,
Assets held for use – such as supplies and exchange, and other disposition including
items of property plant and equipment like pacto de retro sales and other conditional
buildings, property improvements, and sales of capital assets
equipment.
Type of Gain Applicable Taxation Scheme
Capital Assets
Ordinary Gains Regular Income Tax
- Property held by the taxpayer (whether or Capital Gains General Rule:
not connected with his trade business), Regular Income Tax
but does not include ordinary assets. Exception rule:
Capital Gains Tax
Basically, capital assets are:
Capital Gains Subject to CGT
Personal (non-business) assets of individual
taxpayers There are only two types of capital gains subject
to capital gains tax:
Business assets of any taxpayers which are:
Capital gains on the sale of domestic stocks
Financial assets – such as cash, sold directly to buyer.
receivables, investments Capital gains on the sale of real properties
Intangible assets – such as patent, not used in business.
copyright, leasehold rights; franchise
rights
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Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
Capital Gains Tax – Scope
Applies to ALL classes of taxpayers:
Individuals or corporations, regardless of
the place of sale, the identity of the buyer
and the length of time the domestic stocks
were held by the taxpayer
NRA-NETBs and NRFCs are required to file
the CGT return
Sale, Exchange and Other Disposition of This is regarded as the most universal rule
Domestic Stocks Directly to the Buyer in income taxation
Domestic stocks are evidence of ownership or CAPITAL GAINS TAX COMPLIANCE
rights to ownership in a domestic corporation Transactional Capital Gains Tax
regardless of its features, such as:
The capital gains or losses are required to
1. Preferred stocks (participative, cumulative, be reported after sale, exchange and other
etc.) disposition through the capital gains tax
2. Common stocks return, BIR Form 1707;
3. Stock rights The CGT return shall be filed within 30
4. Stock options days after each sale, exchange and other
5. Stock warrants disposition of stocks. If qualified for
6. Unit of participation in any association, installment payment, the tax is due within
recreation, or amusement club (golf, polo or 30 days after each installment
similar clubs)
Installment Payment Requirements:
The capital gains tax covers not only sales of
domestic stocks for cash but also exchange of The stocks are sold in installment;
domestic stocks in kind and other dispositions
such as: Selling price exceeds P1,000; and
Initial payment does not exceed 25% of
1. Foreclosure of property in settlement of debt the selling price
2. Pacto de retro sales- sale with buy back
agreement Initial Payment
3. Conditional sales- sales which will be perfected
upon completion of a certain specified conditions. - Payment or payments which the seller
4. Voluntary buy back of shares by the issuing receives before or upon execution of the
corporation- redemption of shares which may be instrument of sale and payments which he
re-issued and not intended for cancellation. expects or is scheduled to receive in cash
or property (other than evidence of
Capital Gains Tax on Sale on Shares of Stock indebtedness of the purchaser) during the
taxable year when the sale or disposition
Transaction Basis Rate of the real property was made.
Sale, Exchange and - It covers any down payment made and
Other Dispositions of Net 15% includes all payments actually or
Domestic Gain Or
constructively received during the year of
Dispositions of Up to P100,000 - 5%
Excess of sale.
Domestic Stock - Do not include the amount of mortgage on
P100,000 – 10%
Directly to Buyer the real property sold except when such
Stock Directly to mortgage exceeds the cost or other basis of
Buyer the property to the seller.
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Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
Real Property Classified as Capital Asset Exceptions to the 6% Capital Gains Tax
Located in the Philippines
Alternative taxation rule
Transaction Rate Tax base An individual seller of real property capital assets
Sale, exchange and has the option to be taxed at either:
other disposition of The higher
real property capital 6% between the a) 6% capital gains tax, or
assets in the selling price or b) The regular income tax
Philippines the fair value
This is permissible only when:
Under the NIRC, the fair value of real property is 1. The seller is an individual taxpayer, and
whichever the higher of the: 2. The buyer is the government, its
instrumentalitites or agencies including
a. Zonal value, which is the value prescribed the government owned and controlled
CIR for real properties. corporations.
b. Assessed value, which is the value prescribed
by the City or Municipal Assessor’s office for Basis: Ease the burden of government
purposes of the real property tax. expropriation
Note: Zonal value exists only for land. But Principal residence
assessed value is prescribed separately for land
and improvements. The house and lot which is the primary domicile
of the taxpayer. If the taxpayer has multiple
Nature of the 6% Capital Gains Tax residences, his principal residence is deemed that
one shown in his latest tax declaration.
a. Presumption of capital gains
- The 6% capital gains tax applies even if the Exemptions:
sale transaction resulted to a loss. Gain is
always presumed to exist. The basis is the The sale, exchange and other disposition of a
selling price or fair value whichever is principal residence for the reacquisition of a
higher, not the actual gain. new principal residence by individual taxpayers
b. Non-consideration to the involuntariness is exempt from the 6% capital gains tax.
of the sale
- The 6% capital gains tax applies if the sale Requisite for Exemption
is involuntary or is forced by
circumstances such as in the case of 1. The seller must be a citizen or resident alien.
expropriation sale and other forms of 2. The sale involves the principal residence of the
forced disposition. It also applies to seller-taxpayer.
conditional sales and pacto de retro sales. 3. The proceeds of the sale is utilized in acquiring
a new principal residence.
Scope of the 6% Capital Gains Tax 4. The BIR is duly notified by the taxpayer of his
intention to avail of the tax exemption within 30
(a) This applies to real properties located within days from the sale through a prescribed return
the Philippines and “Sworn declaration of intent”.
(b) Applies to all individual taxpayers and only to 5. The acquisition of the new residence must be
domestic corporations. The tax code does not within 18 months from the date of sale.
impose final capital gains tax on foreign 6. The capital gain is held in escrow in favor of the
corporation. If they sell and realize a gain for the government.
sale of the capital assets, the capital gain is subject 7. The exemption can only be availed of once in
to the regular income tax. every 10 years.
(c) Sale of real properties abroad by taxpayers 8. The historical cost or adjusted basis of the
who are taxable on global income is subject to the principal residence sold shall be carried over to
regular income tax the new principal residence built or acquired.
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Junior Philippine Institute of Accountants and Auditors – United
Income Taxation
6% Capital Gains Tax – Real Property Capital
Assets
Installment Payment
Requirement: Initial payment does not exceed
25% of the selling price.
- Payment or payments which the seller
receives before or upon execution of the
instrument of sale and payments which he
expects or is scheduled to receive in cash
or property (other than evidence of
indebtedness of the purchaser) during the
taxable year when the sale or disposition
of the real property was made.
- It covers any down payment made and
includes all payments actually or
constructively received during the year of
sale.
- Do not include the amount of mortgage on
the real property sold except when such
mortgage exceeds the cost or other basis of
the property to the seller.
Payment Due Date
Within 30 days from the date of sale or exchange.
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