This is not a new tax being introduced by the finance bill 2012
The Income Tax CHAPTER 470 of the laws of Kenya has always given KRA the powers to Tax Rent Income just like any other Income. The following is an extract from the said Act.
“Section 3 (1) Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.
(2) Subject to this Act, income upon which tax is chargeable under this Act is income in respect of –
a) Gains or profits from –
i. a business, for whatever period of time carried on;
ii. employment or services rendered
iii. a right granted to another person for use or occupation of property;”
Basically what KRA is doing by geospatial mapping out all properties is to address is administrative weaknesses to ensure all persons who are supposed to pay are tax compliant. This what the minister emphasized during his budget speech.
- Tax is not on gross Rent as paid by Tenants
As per section 3(2) (a) (iii) it talks about the profits made by the landlord, so the landlord is entitled to claim all expenses incurred by him/her if they are not of capital Nature subject to section 15 & 16 of the income tax Act Cap 470. Expenses such as interest on mortgage are tax deductable. Any Expense of Capital nature is capitalized as the value of building and the landlord is allowed to claim it in 4 installments (25% every year) before arriving at the taxable profit. By being allowed to claim the cost of construction in a period of four years which is usually shorter than most mortgages periods of 10-15, it means landlord are in a win-win situation since they will be in a taxable loss position for a period of more than 5 years from the date of first occupation. Most investments in the real estate take 10-15 years to recoup the cost of investments. So the Commissioner is very generous by giving the taxpayer just four years to claim the capital expenditure incurred.
However for non-resident landlords (persons who do not resided in Kenya for that particular year of income) they are not allowed to claim any expenses on their rent at it is taxed at a flat rate of 30%
- Tax is not 30% for all taxpayers.
The computation of the income tax for resident persons depends on whether it is a company or an individual plus whether the taxpayer is resident or non-resident. For resident individuals the following are the tax brackets on a graduated scale.
Yearly Income (profit)
Rate of tax
The first 121,968 -10%
Next bracket 114,912 – 15%
Next bracket 114,912 -20%
Next bracket 114,912- 25%
ABOVE 466, 704-30%
This is after aggregating all incomes (e.g rent, business, employment, e.t.c.)
For companies the Tax is at a flat rate of 30%. But are always advantages to properties through a company because of limited liability.
Non-residents companies pay 37.5% on net income if they have a permanent establishment in Kenya. For others who don’t have a permanent establishment the tax is 30% of the gross amount before deducting expenses.
4. Periodicity of the Tax
This is an annual tax paid in four installments when the tax liability is more than 40,000 a year. But the Commissioner does not stop anyone from paying the tax monthly if this is the most convenient way for them to pay, so long by the due dates of the installments all taxes are paid in full.
- Burden of paying of Income tax
This is a direct tax and the person earning the income is the one who bears the burden of tax. Thus the landlords are not supposed to adjust the rent upwards theoretically since the higher the income the more the tax they will pay. For indirect taxes such as VAT the burden of paying is on the consumer of the service/goods, but is usually collected by business and remitted to KRA, that’s why it usually passed to the consumer. But due to ignorance of some landlords and impunity they are going to increase the rents not knowing they will expose themselves to higher taxes.