Landlords who want to benefit from the tax amnesty that Treasury secretary Henry Rotich offered them on Budget Day will have to declare and pay tax on rental income earned since January last year, the Finance Bill 2015 tabled in Parliament last week says.
The amnesty is, however, restricted to individuals who earned rental income of Sh10 million or less before 2014, leaving companies with rental income to bear the full burden of the income tax.
The Finance Bill, which the Leader of Majority Aden Duale tabled in the National Assembly last week, offers landlords a wide range of incentives, including waivers on penalties and interests charged on taxes due but for which the principal amount will have been paid by July 1, 2016.
“The commissioner shall, with effect from July 1, 2015, refrain from assessing or recovering … taxes, penalties or interest thereon in respect of any period before and during the 2013 year of income,” the Bill says, offering a measure of relief to property owners.
Mr Rotich changed the rules to remove the many challenges that the Kenya Revenue Authority (KRA) has been facing with the enforcement of the current tax regime, which has led to collection of less than Sh5 billion annually from individuals and companies that own property.
The taxman currently charges individuals net rental income tax at the graduated rate of 10 per cent on the first Sh121,968 and 15 per cent, 20 per cent and 25 per cent on the next three progressions of Sh114,912 each.
Any amount above this – exceeding the cumulative Sh466,704 – is taxed at a flat rate of 30 per cent.
Companies are taxed a uniform 30 per cent of any rental income.
Both classes of taxpayers are allowed to deduct costs like land rates, insurance and utilities before arriving at the taxable amount.
Mr Rotich has, however, simplified the taxes to 12 per cent of gross rental income of Sh10 million or below to ease the taxman’s work.
The KRA is from July 1 expected to start collecting the tax on rental income earned in 2014 onwards and landlords are expected pay the levy on a monthly basis.
Besides being spared taxes not paid in earlier years, landlords who declare rental income for 2014 and 2015 and who will have paid the principal tax due by June 2016 will have their penalties and interest for the period waived.
Mr Rotich hopes the changes will simplify the tax code and lay the ground for better enforcement in the coming years.
The tax amnesty will not apply in respect of landlords who have been assessed by KRA or who are under investigation relating to undisclosed income.
Landlords already in the grip of KRA under the outgoing taxation regime will, however, be allowed to deduct 40 per cent of their expenses if they don’t have documentation of costs incurred to generate the rental income.
The Sh10 million threshold means the government has its eyes trained on the majority of landlords offering accommodation to poor and middle-class households, and who have not been paying income tax for decades.
“This amnesty has been introduced to promote tax compliance and encourage landlords to declare their rental income,” tax advisory firm RSM Ashvir said in a statement.
Changing the tax rate to 12 per cent of the gross rental income means landlords will not be able to deduct costs such as finance, wages, utilities and land rates before paying KRA. This means there will be no distinction between profitable and loss-making property holdings.
The Finance Bill has anticipated the apparent inequity by providing that individuals can elect in writing to pay tax under the normal rate of 30 per cent of net income.
Landlords are therefore expected to choose which system between the two is more favourable to them in terms of the absolute tax liability and costs of compliance.
Non-resident landlords, who are not allowed to claim any expenses, will continue to be taxed at a flat rate of 30 per cent of gross rental income in the form of withholding tax, payable by the tenant to the KRA.
The taxman reckons that his inability to tap into the booming real estate’s billions is due to lack of reliable property and ownership data.
The shift to gross rental income as the basis of taxation, however, means that all KRA has to do to determine tax liability is to find the rent paid by tenants and attach the levy.
RSM Ashvir says that while the tax rate has not been prescribed in the Finance Bill, it is expected to be 12 per cent of the gross rental income as per the Budget speech.
The audit firm, however, said the tax cannot be enforced until the rate is prescribed in Section 34 of the Income Tax Act, a requirement that can be met by publication of new amendments.
“The [Finance] Minister may, by notice in the Gazette, prescribe rules for the better carrying out of the provisions of this section,” the Finance Bill says of the new residential rental income tax. The tax is part of measures that Mr Rotich expects to raise an additional Sh25 billion to finance the Sh2.1 trillion budget in the 2015/16 fiscal year.