KENYA REVENUE
AUTHORITY
TAX COMPLIANCE
FOR
REAL ESTATE DEVELOPERS
&
RENTAL INCOME EARNERS
1
Scope of Presentation
Introduction
Types of Income Chargeable to Tax
Return filing and Payment
Tax Relief
Tax Incentives
KRA Expectations
Conclusion
2
INTRODUCTION
Taxation of income in Kenya is governed by the
provisions of the Income Tax Act (Cap. 470), which
became effective on 1st January 1974.
Imposition of Income Tax
Income Tax is a direct tax on income and is 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 (Section 3(1)).
3
Types of Income Chargeable to Tax
Business Income from any trade or profession.
Income from employment or services rendered.
Rent Income.
Pensions Income.
Investment Income - dividends and interest among
others.
(For Others please see Section 3 (2) of Income Tax
Act, Cap 470).
4
Income from Business
Real Estate Development
This is a business of developing and selling of
property.
Tax is chargeable on the net profit after deducting
allowable expenses under Section 15 of the Income
Tax Act, Cap 470.
5
Income from Business…Cont.
Examples of the allowable expenses include:
• Professional fees paid to Quantity Surveyors,
Architects, Civil engineers, Electrical engineers, e.t.c.
• Material costs,
• Labour,
• Advertising/marketing and other administrative costs.
Disallowable expenses are specified under section 16
of the Income Tax Act, Cap 470.
6
Income from Employment
An amount paid to persons “Resident or Non
Resident” in respect of any employment or services
rendered by him in Kenya or outside Kenya; (Section 5
(1)(a) Income Tax Act, Cap 470),
or
An amount paid to a Non Resident person in respect of
employment or services rendered to an employer who
is resident in Kenya or the permanent establishment in
Kenya of an employer who is not so resident, shall be
deemed to have accrued in or derived from Kenya
(Section 5(1)(b) Income Tax Act, Cap 470).
7
Rental Income
Rental income is taxable under section 3(2) (a) (iii) of
the Income Tax Act, Cap 470 Laws of Kenya. In
addition,
rent
on
non-residential
buildings
(Commercial) is taxable under section 5 & 6 of the
VAT Act, Cap 476.
What is Taxable? - All rent, premium or any other
consideration for use or occupation of property.
Who is taxable/assessable? - All persons in receipt of
rental income unless exempted specifically under any
laws.
8
Records and Information
to be Maintained
Proper records should be maintained for all rental
property indicating the following:
•
•
•
•
•
•
•
Land reference (L.R.) number
Year of construction
Date of purchase for buildings rented out
When first let and certificate of occupation
Cost of construction
Building plans
Loan agreements
9
Records and Information
to be Maintained…Cont.
• Number of rentable units and rent per unit
• Rent received and rent receipt books
• Related expenses (invoices and receipts to support
expenses)
• Lease/tenancy agreements.
• Bank and loan statements.
• Rent schedules (income and expenditure account).
• Any other relevant documents/records.
10
How to determine Taxable Income
1. Income Tax on Rental Income
Prepare rent schedule for all let property showing;
• Land reference number and location of the property
• Gross rent received per property
• Total gross rent received for all property
• All expenses incurred per property
11
How to determine Taxable Income
1. Income Tax on Rental Income…Cont.
Deduct only allowable expenses (incurred wholly
andexclusively in the production of rental Income) to
arrive at the chargeable rent (expenses to be supported
with documentary evidence).
Complete tax return and attach rent schedule in
support thereof.
Submit self-assessment return within six months
after the end of the accounting period.
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How to determine Taxable Income…Cont.
2. VAT on Commercial Rent
Prepare VAT Account showing the VAT charged to
tenants (output VAT) and allowable VAT on
purchases (input VAT) incurred in the month.
• The taxable value includes service charge and
other incidental costs passed on to the tenants.
13
How to determine Taxable Income…Cont
2. VAT on Commercial Rent
File VAT 3 return and make payment by 20th day of
the following month to any of the appointed banks.
Note:Receipts/invoices issued to tenants and
receipts/invoices on purchases are supposed to
show the VAT charged and shall be ETR
generated.
14
How to determine Taxable Income…Cont.
3. VAT on Commercial Rent
TAX POINT
Means when tax is due and payable - though
taxpayers can defer payment up to 20th of the month.
Tax point is determined by the EARLIEST of the
following:• Date supplies are made
• Date of invoice
• Date payment is made in full or part
15
How to determine Taxable Income…Cont.
Examples of a Rent Schedule
Example 1: Resident Individuals
Mrs. Landlord has two property from which she earns
rent as follows:
Property A with 5 units, at Kshs.20,000 per month per
unit and Property B with 10 units at Kshs.15,000 per
month per unit. All the units were occupied by tenants
throughout the accounting period of 2010.
Her accounting period ends on 31st December, 2010.
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How to determine Taxable Income…Cont.
During the accounting period, she incurred the following
expenses:
•
•
•
•
•
•
•
Land Rent/Rates
Property insurance
Agents fees
Repairs
School fees
Loan interest
Electricity
–
–
–
–
–
–
–
Kshs. 10,000
Kshs. 20,000
Kshs. 30,000
Kshs.160,000
Kshs.120,000*
Kshs. 85,000
Kshs. 60,000
During the year, her principal loan repayment amounted to
Kshs.250,000**
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How to determine Taxable Income…Cont.
Gross Rent income for the year:
Property A - 5 units x Kshs.20,000 x 12 months
Property B – 10 units x Kshs.15,000 x 12 months
Total Rent income in Kshs.
Less: Allowable expenses (Kshs.):
Land Rent/Rates
10,000
Insurance
20,000
Agent’s fees
30,000
Repairs
160,000
Loan interest
85,000
Electricity
60,000
Net taxable rent income (Kshs.)
Notes:
1,200,000
1,800,000
3,000,000
365,000
2,635,000
* School fees is a personal expenditure that is not allowable deduction.
** Principal Loan repayment is a capital item and not an allowable
deduction.
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Rates of Tax
Different rates of tax are applicable to individuals and
corporate entity depending on residence status.
For resident individuals, the annual tax rates (on total
annual income including net rent income) are as
follows:
On the first Kshs.121,968 .....................10%
On the next Kshs.114,912 .....................15%
On the next Kshs.114,912 .....................20%
On the next Kshs.114,912 .....................25%
On all income over Kshs. 466,704.........30%
Note: The above scales are referred to as “graduated”
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Rates of Tax…Cont.
Resident companies are taxable at a rate of 30%
Non-residents (for tax purpose) - withholding tax @
30% on gross rent as a final tax.
Estate of deceased landlords - chargeable at resident
corporate tax rate of 30%.
VAT on non-residential Rental Income (Commercial
rent) - charged at 16% .
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Tax Computation
Taxable annual net rent income for the year – Kshs.2,635,000
The first Kshs.121,968 @ 10%
12,197
The next Kshs.114,912 @ 15%
17,237
The next Kshs.114,912 @ 20%
22,982
The next Kshs.114,912 @ 25%
28,728
The balance of Kshs.2,168,296@30% 650,488
Total tax Payable
731,632
Less: Personal relief
13,944
Net tax payable
717,688
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Withholding Tax- Section 35 (1) & 35 (3)
This is a method whereby the payer of certain incomes
is responsible for deducting tax at source from
payments due to certain payees and remitting the tax
so deducted to the Commissioner, on or before the 20th
day of the following month (W8F for residents and
W3 for non- residents).
A withholding tax certificate W9F is issued to the
resident and W3C to the non-resident.
Rates vary on each of the types of income depending
on whether the recipient of the income is a Resident or
Non Resident.
Withholding TaxSection 35 (1) & 35 (3)…Cont.
Management or Professional or Training fees:
- @ 10% for Residents – w.e.f. 9th June, 2011.
- @ 20% for Non-Residents.
Contractual fee in respect of building, civil or
engineering works:
- @ 3% for Residents.
- @ 20% for Non – Residents.
Rents received by Non-Residents - @ 30%
Payment Mode
If Mrs. Landlord had paid 4 equal instalments of
Kshs.150,000 each for the year, totalling
Kshs.600,000 then she would have a balance of
Kshs.117,688 to pay by 30th April 2011.
However, if she had not paid any instalments in
advance, then the entire amount of the Kshs.717,688
would be payable by 30th April plus penalties and
interest for failure to pay instalments when they were
due as per the law.
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Payment of Instalment Tax
The installment payments are spread evenly @ 25%
of the tax due and payable on or before the 20th day of
the 4th, 6th, 9th and 12th month of the accounting
period for all taxpayers.
Instalment tax is paid by persons (individual and
corporate) whose tax liability for the accounting
period exceeds Kshs.40,000.
25
Payment of Instalment Tax…Cont.
However if tax liability does not exceed Kshs.
40,000 the tax is payable by 30th of the fourth
month after the accounting period.
The balance of tax is payable on or before the last
working day of the fourth month following the end
of the year of income or accounting period.
Filing of Returns and Payment of Taxes
Filing of tax returns is done using the prescribed forms,
however, taxpayers are encouraged to file on line.
To file online, you must register with KRA online
services.
Online filers are required to generate an e-slip for
payment and present it to any branch of the National
Bank of Kenya or Co-operative Bank of Kenya with
the applicable tax due.
For details on how to file your returns online, please
visit the KRA online services at www.kra.go.ke/portal.
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Tax Reliefs
Personal relief for Resident Individuals :– Kshs.13,944
per annum.
Relief on premiums paid for Life, Education and Health
policy for Resident Individuals:- 15% of premiums
paid subject to a maximum of Kshs.60,000 per annum
(w.e.f. 1st January, 2007).
Note:
- Life or education policies – whose term commences on
or after 1st January, 2003.
- Health policy whose term commences on or after 1st
January, 2007.
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Tax Incentives
Deduction of interest paid on Mortgage for owneroccupied property, subject to a maximum of
Kshs.150,000 per year.
Deduction of funds deposited under a Registered
Home Ownership Savings Plan, subject to a
maximum of Kshs.48,000 per year.
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Tax Incentives…Cont.
Industrial Building Allowance on the cost of
construction as per paragraph 1(1) of the Second
Schedule of the Income Tax Act. The applicable rates
depend on; the nature, use and area the building is
constructed.
• Rental residential buildings done in planned residential
areas approved by the Minister for Housing; the rate of
allowance is 5%; (w.e.f 1st January 2008) . However, if
the developer put up roads, power, water, sewers and
other social infrastructure then the rate is 25% (w.e.f
1st January 2010).
30
Tax Incentives…Cont.
Wear and Tear allowance on machinery and equipment
as per the Second Schedule of the Income Tax Act, Cap
470.
Incentives to Real Estate Developers
Section 20C of the Income Tax Act exempts income of
Real Estate Investment Trusts (REITs) from taxation.
(
(This
incentive is available effective 1st January, 2012).
Under the VAT Act, investors in low income housing
projects qualify to apply for VAT remission (Effective
from 15th June 2007). Relevant regulations are contained
in Legal Notice No. 115 of 2nd September, 2008.
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Facilitation Measures
To facilitate and encourage taxpayers to voluntarily
comply the following measures have been put in place:
• Help desks set up at Times Tower and in all
Domestic Taxes Department stations country wide
including satellite stations.
• To provide taxpayers with relevant information on
Real Estate and Rental Income a webpage has been
created at the KRA website.
Facilitation Measures…Cont
• Information pack containing information on what
taxpayers need to know and answers to Frequently
Asked Questions (FAQs) are available at the web
page.
• The following email address created to enhance
communication between KRA and taxpayers on
areas of concern; rentalincome@kra.go.ke
• Planned Countrywide taxpayers’ sensitization
seminars.
KRA Expectations
Voluntary disclosure of income earned by real estate
developers and rental income earners.
Timely filing and payment of the self assessed
taxes by real estate developers and rental income
earners.
Keeping of proper records and any relevant
information for tax purposes.
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CONCLUSION
Taxpayers
are encouraged to comply with
provisions of the relevant laws to avoid penalties
and interest that may accrue due to non compliance.
Taxpayers are encouraged to get relevant assistance
from KRA.
For professional advice Taxpayers are encouraged to
contact ICPAK (www.icpak.com).
KRA upholds partnership with key stakeholders and
will ensure accurate Tax information is provided in
order to enhance Voluntary Tax Compliance.
Tulipe Ushuru, Tujitegemee!
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END
THANK YOU
Tulipe Ushuru, Tujitegemee!
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