A month ago, Kenya Revenue Authority (KRA) made an announcement that showed the seriousness of it going after landlords for rental income tax.
KRA stated that it had initiated a mapping exercise using geographical information system (GIS) to mark out residential buildings in Nairobi and other urban centres with the aim of verifying their compliance with the payment of rental income tax.
The process involves KRA agents physically identifying residential buildings block by block and feeding that information to a block management system (BMS) which then accurately captures the number of buildings in a certain area.
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This information is then verified for accuracy using GIS and for rental income tax compliance when correlated with information from other money trails such as utility bill payments and tenant tax returns.
The system will also allow KRA to know which new buildings are coming up in the block.
Experts in property tax matters say that the days of the landlord outside the tax bracket are numbered especially in an increasingly digital world.
Francis Kamau, partner and tax leader at professional services firm Ernst & Young says that previously, landlords evaded tax simply because they could do so and that now the noose is tightening and the only option is compliance or working smart at tax avoidance options within the same system.
“No one wants to see their net take home from an investment reduced. Landlords are businesspeople and their drive is the profit (motive),” says Mr Kamau.
“Landlords are increasingly approaching us for solutions on the best ways to comply with the taxman demands while still taking something home.”
Rental income tax is charged on the rent paid to the landlord by the tenant of a residential property. Rental income tax was introduced in 2015 and took effect in January of the following year.
At the time of introduction, all landlords earning gross rental income of between Sh144,000 and Sh10 million a year were required to pay 10 per cent as rental income tax to the taxman.
In 2021 this was revised to gross earnings of at least Sh288 000 on the lower end and Sh15 million on the upper limit. Non-residents of Kenya are exempted from the tax as are commercial properties.
Nikhil Hira, a tax expert with experience spanning East Africa reckons that the only reprieve for landlords is to use the net income provision where KRA offers landlords to pay 30 per cent of their yearly net rental income as tax.
This applies mostly if a property has both residential and commercial use.
“It is difficult to manoeuvre what you pay KRA when dealing with gross figures because KRA only needs to count the number of tenants and amounts payable and receipts,” says Mr Hira, a tax partner at Kody Africa LLP.
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“It is important to note that this tax is not new. It is just the compliance levels going up. And like any tax, there’s a cost implication which will have to be passed somewhere and most likely to the tenant, in some form.”
According to the experts, when a landlord applies to pay rental income tax on his net annual rental revenue, he or she has an opportunity to first deduct expenses such as professional fees, cost of building materials or labour or any advertisement costs incurred on the property during the period.
This tax avoidance route is possible because KRA allows one to pay 10 per cent monthly of gross rental income revenue or 30 per cent as rental income tax annually on the gross revenue less any expenses incurred on the property.
In Kenya, a landlord is required to pay rental income tax by the 20th of the next month if they have not applied for the annual tax payment option. Late compliance attracts a Sh2,000 penalty or five per cent of the rental income tax due while penalties for non-compliance are heavier.
Rwanda has the highest rental income tax at 20 per cent followed by Uganda at 12 per cent and Tanzania at 10 per cent of gross rental revenue.
Gikonyo Gitonga, the managing director of property firm Axis Real Estate says that the debate on expanding the tax base has been in the works for some time now and it is just beginning to come alive.
“For the government, this is a revenue stream, an extended source of income to tap into. For landlords, this is an additional cost,” notes Mr Gitonga.
“It is important to keep records of all transactions regarding your property to be able to account for every amount.”
The taxman is on an aggressive campaign to raise the much-needed tax revenue by broadening the tax bracket and netting landlords who for some time now have been collecting rent but not paying rental income tax.
As of June 2021, the KRA had managed to add to its tax bracket over 76,000 landlords.