Rental income has always been taxed

When the Minister for Finance read his budget statement on 14th June 2012, bringing landlords into the tax net was one of the administrative measures he proposed.

I am using the term administrative because this was not a change in the legislation governing taxation of property rental income. This source of income has been subject to tax for the 40 years that the Kenya Income Tax Act has been in operation.

Prior to the Kenya Income Tax Act, we had Income tax legislation existing at the time, including during colonial period that subjected rental income to tax.

Currently, rental income is chargeable to tax under sections 3(2) (a) (iii) and 6 of the Income Tax Act. Other sections such as section 15 provide for deductions that are allowed against rental income.

However, because of the lack of understanding of taxation and the way issue was communicated to the public, it elicited furore among the rent paying public including some groups such as consumer organisations and trade unions.

One organisation even threatened to go to court to stop KRA from enforcing the measure under the pretext of “protecting” consumers even though it never made good the threat.

One newspaper caption indicated that landlords would pay 30 per cent income tax on “money” they get from their rental houses. Another indicated that rents could go up by 30 per cent as a result of tax measures announced by the Minister.

Such information can create the wrong impression that rental income is taxable at 30 per cent of the gross receipts. While this is true for non-residents, the same is not the case for resident persons as they are allowed to deduct business related outgoings against the income.

Apart from the monthly rental income, owners of commercial properties often charge a one –off non-refundable premium commonly known as goodwill or key money. Such income is taxable in the year of receipt and is not allowed to be spread over the lease term.

All the usual expenses of revenue nature such as land rents and rates, repairs, gardening, water, electricity, mortgage interest and salaries are deductible if incurred on the properties on which the income is being charged to tax.

There are certain deductions, which even though they appear to be capital in nature are allowable against rental income. One such deduction is structural alterations to the premises necessary to maintain existing rent.

It should however be noted that if the rents are increased immediately after the alterations, the tax authority would seek to disallow the expense.

I must commend the Institute of Surveyors of Kenya (ISK) for coming out to clarify this issue when it is still fresh in the minds of the public. The KRA reiterated the position during a budget review workshop with ICPAK a few days later.

The drive to bring in real estate players not already in the tax net is a noble one considering that the industry had a good run in the last five years in which the taxman should share.

The momentum that has started of sensitising taxpayers and recruiting them should be maintained with the necessary resources deployed to all the major towns.