Deloitte wants land sales adjusted for inflation to avoid taxing paper gains

The historical cost of land should be adjusted for inflation before taxation to avoid charging paper gains, an expert has said.

Deloitte East Africa tax director Maurice Wangutusi said the net gain on land that was bought many years back carries a very big component of inflation.

He said with many jurisdictions around the world making effort to distinguish between the paper gain and real appreciation of land, Kenya should be no exception.

Speaking at a capital gains tax workshop in Nairobi on Thursday, he said in calculating the inflationary component the authorities could make use of tools that track changes in value of money, such as the price and consumer index produced every year by the Kenya National Bureau of Statistics.

“We should come up with mechanisms to quantify the inflation and arrive at the real value of the money over the period of time,” said Mr Wangutusi.

“Once we come up with the paper gain, we should remove that inflationary element and then tax against the real value of the property as opposed to taxing the paper profit.”

Some of the land sellers may however find it difficult to trace the original sale documents to determine the purchase price.

“We cannot do anything about the current transfer value, but we can adjust the acquisition cost particularly where the land was bought many years ago,” he added.

He said calculation of the adjusted cost should also take into account the developments that have been made on the land.

The astronomical rise in land and property prices was one of the key reasons behind the push to reintroduce capital gains tax.

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

Ironically the capital gains tax guidelines issued by the Kenya Revenue Authority (KRA) exempted any land sale where the proceeds are less than Sh30,000 as well as sale of less than 100 acres of rural agricultural land.

The tax on land and real estate transactions has attracted less noise than that of listed shares, which is the subject of a court dispute between KRA and stockbrokers on modality of implementation.

The biggest beneficiaries of inflationary adjustment would be sellers of land that has been held in family hands over decades — taking into account that land prices in Kenya have gone up astronomically as population pressure grows.

Land prices in many places have by far outpaced the inflation rate in the general economy, meaning that while the sellers would take a tax hit, the adjustment would still reduce the liability to some extent.

Stanlib and HassConsult land index data shows that over the past seven years, advertised land prices in Nairobi’s fastest developing suburbs have gone up fivefold (535 per cent).

“Commercial and high-density housing are driving up the pricing…the pressure caused by the inherently limited supply,” said Kenneth Kaniu, chief investment officer Stanlib.

The price boom has led to an increase in land subdivision as holders cash in on the demand, resulting in some experts cautioning of a risk to food security as developments gobble up the limited land suitable for agriculture.