KENYA REVENUE AUTHORITY

TAX COMPLIANCE

FOR

REAL ESTATE DEVELOPERS &

RENTAL INCOME EARNERS

Scope of Presentation

۩ Introduction

۩ Types of Income Chargeable to Tax

۩ Taxpayer Obligations

۩ Tax Relief

۩ Tax Incentives

۩ Conclusion

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)).

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 other incomes.

(For Others please see Section 3 (2) of Income tax Act, Cap 470).

Income from Real Estate Businesses

Real Estate Development This is a business of developing and

selling property. Tax chargeable on the net profit after

deducting allowable expenses under Section 15 of the Income Tax Act, Cap 470.

Income from Real Estate Business…Cont.

Examples of the allowable expenses include: Cost of acquisition of land Professional fees paid to Quantity

Surveyors, Architects, Civil engineers, Electrical engineers, e.t.c

Cost of building material Labour

Income from Real Estate Business…Cont.

Advertising/marketing and other administrative costs.

Bad debts written off or specific provisions. Interest on money borrowed to earn

investment income. Hire expenses for equipment and

commercial vehicles

Income from Real Estate Business…Cont.

Disallowable expenses are specified under Section 16 of the Income Tax Act.

Depreciation Cost of maintaining self and family Capital expenditure General provisions for bad debts Tax paid to the government Hire of non-commercial vehicles

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 Laws of Kenya.

Rental Income

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.

Rental Income…Cont.What income period is the tax assessable?

Assessment of Rental income may be made at any time prior to the expiry of seven years after the year of which the income relates; (Section 79(1) of the Income Tax Act, Cap 470).

Taxpayers are however advised to declare income and pay the principal tax and submit application for waiver of penalties and interest to the Commissioner.

How to Determine Taxable Income1. Income Tax on Rental Income Prepare rent schedule for all let properties

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

How to Determine Taxable Income…Cont.

Deduct only allowable expenses (incurred wholly and exclusively in the production of rental income.

Complete tax return and attach rent schedule in support thereof.

Submit self-assessment return within six months after the end of the accounting period or year of income.

How to Determine Taxable Income…Cont.

2. VAT on Commercial Rent

Who qualifies to register for VAT? Taxpayers with a turnover of Kshs.5 million

and above per annum on commercial buildings.

NB: –Rental income on commercial buildings earned by VAT registered persons should form part of the taxable supply.

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.

Note: Receipts/invoices issued to tenants and receipts/invoices on purchases shall be ETR generated.

2. VAT on Commercial Rent…Cont.

Taxpayer Obligations

1. Voluntary registration for appropriate tax obligation.

2. Voluntary disclosure of income earned by real estate developers and rental income earners; (Section 52B of the Income tax Act, Cap 470)

3. Keeping of proper records and any other relevant information for tax purposes; (Section 54A(1) of the Income tax Act, Cap 470).

Taxpayer Obligations…Cont.

1. Timely filing and payment of the self assessed installment taxes by real estate developers and rental income earners; (Section 12 of the Income tax Act, Cap 470).

2. Deduction of withholding tax at source from payments due to certain payees and remitting the tax so deducted to the Commissioner; (Section 35(1) & 35(3) of the Income tax Act, Cap 470).

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 of buildings rented out• When first let and certificate of occupation• Cost of construction• Building plans

Records and Information to be Maintained…Cont.

• Loan agreements

• Number of rentable units and rent per unit

• Related expenses (invoices and receipts to support expenses)

• Lease/tenancy agreements

• Bank and loan statements

Records and Information to be Maintained…Cont.

• Rent schedules (income and expenditure account)

• Any other relevant documents/records

Filing of Returns and Payment of Tax

Taxpayers can file their returns either manually and on line through www.kra.go.ke/portal

For manual filers, fill in the appropriate tax return and make payments to National Bank of Kenya (NBK), Kenya Commercial Bank (KCB) or Co-operative Bank of Kenya on or before the 20th day following the month.

Filing of Returns and Payment of Tax

Note to attach the necessary accounts and the rent schedule for the respective period or year of income.

Filing of Returns and Payment of Tax…Cont.

Note: -If Real Time Gross Settlement (RTGS) method is used to effect payment, the taxpayer should visit KRA (Finance office) for a reflection of the tax paid on the respective ledger with;

• Swift copy (obtained from the bank)• Pay-in-slip (downloaded from www.kra.go.ke)

A receipt will be issued for the taxpayer’s retention.

3. Installment Tax Tax due on rental income is payable in

quarterly installments, also known as ‘Installment 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 or year of income.

Installment tax is paid by all corporate bodies and individuals whose tax liability for the accounting period exceeds Kshs.40,000.

Installment 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.

4.Withholding Tax

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.

This includes payments made to Quantity Surveyors, Architects, Civil engineers, Electrical engineers, e.t.c

The payees should be issued with WHT Cert.

Withholding Tax…Cont. Management or Professional or Training

fees:• @ 5% for Residents.• @ 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%

Tax Reliefs

Personal relief for Resident Individuals @ KShs.13,944 per annum.

Relief on premiums paid for Life, education and Health policies for Resident Individuals.@ 15% of premiums paid subject to a maximum of KShs.60,000 per annum.

Tax Reliefs 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.

Tax Incentives

Deduction of interest paid on mortgage for owner-occupied property, subject to a maximum of Kshs.150, 000 per year.Note: Interest paid on mortgage during the construction period is treated as capital deduction and thus forms part of the cost of construction. The interest on mortgage incurred after issuance of Certificate of Occupation is deducted as an allowable expense.

Deduction of funds deposited under a Registered Home Ownership Savings Plan, subject to a maximum of Kshs.48,000 per annum.

Tax Incentives…Cont.

1. Industrial Building Allowance on: Cost of construction of Normal Industrial

Buildings - at the rate of 10% w.e.f 1st January, 2010.

Residential buildings constructed in a planned development area approved by the Minister for Housing - at the rate of 5% w.e.f 1st January 2008.

2. Commercial Building Allowance on the cost of construction of commercial building - at the rate of 25% (w.e.f 1st January 2010) where roads, power, water, sewer and social infrastructure are provided by the investor.

3. Wear and Tear allowance on machinery and equipment as per the Second Schedule of the Income Tax Act, Cap 470.

Tax Incentives…Cont.

INCENTIVES TO REAL ESTATE DEVELOPERS

Incentives To Real Estate Developers

Section 20C of the Income Tax Act exempts income of Real Estate Investment Trusts (REITs) from taxation.

A REIT is a vehicle which allows investors to pool resources together and invest in Real Estate. The shareholders of REITs acquire units which are tradable at the stock market.

(This incentive is available effective 1st January, 2012)

Incentives to Real Estate Developers

Under the VAT Act, investors in low income housing projects qualify to apply for VAT remission (effective from 15th June 2007).

Introduced in 2008 by Finance Act 2007.

Regulations are contained in Legal Notice No 115 of 5th September, 2008.

Incentives to Real Estate Developers...Cont.

A low income is Kshs.35,000 or less.

A low income house - construction cost not more than Kshs.1.6M with a plinth area of not less than 30 sq metres.

A low income housing project - not less than 20 housing units.

CONCLUSION Taxpayers are encouraged to comply with

the 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).

Tulipe Ushuru, Tujitegemee!

THANK YOU