Transcript of the Income Tax Act, Cap 470).

KENYA REVENUE AUTHORITY
TAX COMPLIANCE
FOR
REAL ESTATE DEVELOPERS
&
RENTAL INCOME EARNERS
Scope of Presentation
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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 nonresident, 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 Income
1. 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.
2. VAT on Commercial Rent…Cont.
 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.
Taxpayer Obligations
1.
2.
Voluntary registration for appropriate tax
obligation.
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.
Tax Incentives…Cont.
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.
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