KRA targets developers’ income from sale of homesWednesday June 20 2012
Property developers will join landlords in parting with a share of their income as KRA tightens the noose on cheats with renewed enforcement of income tax laws affecting real estate.
Also read: MPs clash with Githae over Budget
Kenya Revenue Authority (KRA) commissioner-general John Njiraini on Thursday said a liability tax will henceforth be charged on individual directors of real estate firms to ensure their compliance with the law.
Holding individual directors accountable will facilitate the collection of taxes on all gains made in the lucrative business of constructing and selling homes and commercial buildings that are currently being lost to the directors’ fraudulent schemes.
Mr Njiraini said KRA had unearthed elaborate schemes involving the formation of separate companies to develop homes and use of different ones to sell the same as a means of erasing the traceability of earnings from the business.
Also read: Githae puts Kenyan churches on notice over income tax
“We have amended the legal provisions to impose liability on directors in their personal capacity where they wilfully use corporate structures to evade payment of taxes,” said Mr Njiraini at a Budget review workshop with accountants.
The taxman said use of multiple entities to transact real estate businesses is helping tax-cheats to condense the magnitude of the housing projects, depress profit margins and the resultant tax liability.
Phony companies are folded up as soon as the developers are done with construction when the properties are transferred to different entities to complicate the tax recovery process.
Some developers have also defended non-payment of taxes on profits generated from development and sale of property, terming them as capital gains which are exempt from taxation, according to Mr Njiraini.
“It can be argued forever if their profits can be viewed as capital gains or personal income that should attract tax,” he said.
KRA’s decision to target individual developers comes in the wake of heightened revenue collection targets that the Treasury has set with the rollout of a record Sh1.45 trillion national Budget.
To stop revenue leakages in the booming homes market, KRA wants the Treasury to lift the suspension 27 years ago of the capital gains tax and make it applicable to all players in the real estate market.
Concerns that developers are cheating the tax system have also been raised by the Lands Ministry, which processes all transfers of land and buildings.
Dorothy Angote, the permanent secretary in the ministry, told the Business Daily in a recent interview that sale prices of homes are understated in more than 90 per cent of transfer applications received with the motive of lowering stamp duty liability.
“Virtually all sale transactions from private developers are understated,” said the PS, forcing her office to rely on what is presented by the government’s own property valuers. Stamp duty is levied at four per cent or the value of the property as determined by the government valuer or the agreed selling price.
Mr Njiraini now believes that the 27-year-old waiver has long achieved the intended purpose because “capital gains are now huge and the market vibrant.”
Patrick Mtange, the chairman at the Institute of Certified Public Accountants of Kenya (ICPAK), supported re-introduction of the capital gains tax saying players in the real estate market form the richest class of the society who should not be spared the tax burden.
“It is the wealthy individuals in the property market whom the tax system is offering exemption,” said Mr Mtange adding that the waiver on capital gains should have been lifted long ago.
Prior to the KRA directive, the then Finance minister, Uhuru Kenyatta, had pushed for the reintroduction of capital gains tax for businesses involved in the buying, development and selling of property including land.
Mr Kenyatta’s proposals, however, only required that the entities pay income tax at the rate of 30 per cent on profits realised from the development and sale of property.
The new measures made it a requirement that real estate firms which acquire any property with the aim of reselling book proceeds from the same as business income.
Developers have since circumvented the taxation law, as exposed by KRA, where they form different companies to handle different phases of development and thereafter the selling, thus fragmenting the value chain of the capital appreciation.
Targeting the directors of the individual companies is anticipated to help the taxman to get his share of the overall gains made by owners of the businesses, regardless of how these gains were earned.
Mbugua Kamau, a director at Migaa Limited, a property development company, said the onus is on KRA to ensure tax compliance.
He said developers like any other people in business will seek to explore any tax loopholes to maximise profits.
“There is nothing illegal for developers to reduce their tax liability, it is up to the KRA to ensure there are no loopholes,” said Mr Kamau, adding that smaller developers were more likely to get away with flaws in the taxation system.
Taxation of capital gains has remained a sticky issue for the government even as it tries to widen the tax bracket to enhance revenue collection, to support an expansionary budget.
In 2006, the then Finance minister Amos Kimunya attempted to re-introduce the tax at a reduced rate of 10 per cent limited to land acquisitions, but the motion was rejected in Parliament during debate on the Finance Bill.
In addition to seeking taxation on capital gains, KRA has also moved to get a slice of rental income from landlords.
Mr Njiraini yesterday extended an amnesty to landlords who have not been paying tax on rental income, saying that those who do not comply face the consequences.
“I urge those who have not been making rental income declarations to do so voluntarily at the earliest opportunity and to pay the taxes due thereof. Failure to do so will result in unpleasant consequences when we finally catch up with them.”
KRA hopes to collect Sh90 billion in the next financial year from taxing landlords on the rental income they receive.