Lapsset land sellers escape capital gains tax in new KRA rules

What you need to know:

Property subject to CGT is defined as land, buildings and marketable securities.
Tax paid upon transfer of property but not later than the 20th day of the month following that of transfer.
The taxpayer will do a self-assessment to determine the gain upon which tax is computed.
Income that is taxed elsewhere as in the case of property dealers is exempted.
Issuance by a company of its own shares and debentures is exempted.
Transfer of machinery including motor vehicles is also exempted.

Property owners to be compensated for parcels taken up by infrastructure projects will be spared capital gains tax, new rules put out yesterday show.

Guidelines formulated by the Kenya Revenue Authority (KRA) indicate that compensation relating to the standard gauge railway (SGR), the Lamu Port South Sudan Ethiopia Transport (Lapsset) corridor, oil pipelines, dams and roads will not be taxed.

“Certain transactions are exempted … (including) compensation by Government for property acquired for infrastructure development,” said KRA in the guidelines. In the case of the SGR, at least Sh10 billion is being paid out for the 11,000 acres being acquired between Nairobi and Mombasa. Any land over 100 acres in rural area is subject to the tax.

READ: Capital gains tax to spoil party for investors in stocks, property

Moses Kiambuthi, the chief executive of the Institute of Surveyors of Kenya (ISK), said the logic for the exemption was that the land is acquired by the State compulsorily, without the owners having a choice to refuse.

“It is a compulsory acquisition. You don’t have a choice in that you are not the one choosing to sell. That is the reason for the exemption,” said Mr Kiambuthi. But the ISK chief executive said his sector was still in the dark about the manner of handling many land transactions since the KRA was yet to provide the details.

Also to be exempted are mergers and acquisitions of companies done in public interest as certified by the Minister of Finance. This excludes mergers that are done for commercial interests.

The exemption is also not directed at the petroleum industry, which is charged a higher CGT of 30 per cent for local and 37.5 per cent for foreigner transactions. Where the proceeds of a land transaction is less than Sh30,000 (hardly anywhere near towns) no CGT is to be paid.

Recently, the KRA said it was considering proposals that land less than 100 acres outside major towns, now exempt, would be subjected to CGT. Most of the land transacted in the outskirts is in plots measuring less than 100 acres.

The proposal to impose the levy was based on the fact that land in the outskirts of major towns has risen in value in the past decade or so and such transactions could increase tax collections. Disposal of property as part of administering the estate of a deceased person will escape the taxman’s net.

KRA guidelines issued yesterday warned it would use market prices where related parties attempt to calculate the tax in a manner that minimises tax obligations. Where related parties transact, the KRA Commissioner-General will require a report from a registered valuer.

“Where there is concern that a related party transaction may have led to reduction in the transfer value with a view to minimising the capital gains tax, the Commissioner will make necessary adjustments and/or revaluation to determine the market price,” it said.

The guidelines clarified that when an investor makes a loss in a transaction, it can be carried forward to be offset against a gain of a similar nature at a future date.

“The loss may be carried forward to be offset/deducted against a gain of a similar nature (capital gain only) at a future date,” said the statement.