BY RACHEL MUIRU
The Finance Minister in his budget last week on Thursday outlined various measures to ensure that all landlords are effectively brought into the tax net and all rental income taxes are paid. Key among them will be the mapping out of all residential and commercial areas. This will entail collecting data from the Ministry of Lands, municipal councils and other government departments and comparing this with the tax returns filed with Kenya Revenue Authority (KRA).
Confusion has arisen since the Minister read the budget last week and there are rumours that rent in Nairobi and other major towns is expected to go up as a result of the Minister’s pronouncements. To set the record straight, rent income has always been taxable and this was not a new tax law. Some landlords have not been tax compliant and KRA on the other hand has not been able to bring the landlords to the tax net.
With the introduction of turn over tax in 2007, it was widely expected that the landlords will be roped into the tax net under this tax regime but this did not happen. The Minister’s pronouncements are an indicator of the Government’s commitment to collect taxes from the informal sector whose contribution to the tax kitty is very minimal.
Over the recent past, many investors have invested heavily in the real estate sector thereby providing affordable housing for Kenyans. We have witnessed very ambitious real estate projects worth billions of shillings being flagged off that will offer a variety of facilities including offices, schools, homes, playgrounds in the same locality. Almost every Kenyan living in the present times wishes to own a home in a gated community that has several amenities all located in one place.
Despite the significant growth experienced in the real estate sector, the tax revenue collected from this sector is not in tandem with the growth. The new constitution requires that every Kenyan citizen pay tax on their incomes. Indeed, the 2012 Finance Bill proposes various amendments to our tax laws to ensure that the Head of State and other constitutional office holders pay tax on all their emoluments. Likewise, landlords being big players in the real estate sector are also expected to contribute to the exchequer.
Rent income is subject to corporate tax at the rate of 30 percent of taxable income. The taxable income is arrived at after deducting from the income, expenses that are wholly and exclusively incurred when generating the rental income. These expenses would include interest, management fees, utility bills, wages and salaries etc. In cases where by the above computation results in a loss, the tax payer is allowed to carry forward the loss for the subsequent four years of income.
An application can be made to the Commissioner to extend the loss claim period where the tax payer is not able to extinguish the loss within the stipulated period providing reasons for the same. It is important to note that losses incurred from different sources of income cannot be offset against taxable profits from other sources of income.
An investor who puts up a commercial building for use by him or his lease is entitled to claim a commercial building allowance at the rate of 25 percent per annum of cost incurred provided that the investor has also invested in the social infrastructure such as roads, power, water and sewer systems.
This allowance substantially reduces a tax payer’s taxable income. It is also crucial to note that unlike the industrial building allowance where buildings in use as shops, show rooms, malls, offices and establishments of similar nature are not eligible for industrial building allowance if their cost is 10% or more of the industrial building, these facilities are eligible for commercial building allowance. However, the allowance on the buildings in use as offices and other similar establishments will only be available to new investments commencing in 2013. That notwithstanding, rental income from commercial buildings is also subject to VAT at the rate of 16% provided that the income amounts to Sh 5 Million or more in a year.
(Rachel Muiru is a Tax Manager with Ernst & Young. Views expressed in the article are personal and may not represent the firm’s view.email:Rachel.firstname.lastname@example.org)