Individual residential landlords worried about paying rental income tax are now a less stressed lot as the Kenya Revenue Authority (KRA) launched an amnesty on rental tax income two weeks ago. Based on the Finance Act, 2015, the authority offered this reprieve to reduce the tax burden on the land lords and ease the cost of compliance.
Tax collection can be a very complex process. Mainly because people often find the process of computing taxes rather difficult, hence they procrastinate on following proper procedure in filling out the required forms accompanied by the right supporting documents. Coupled with poor record keeping by tax payers, the process becomes a tangled mess which causes a back log of taxes. Thus organizations tasked with collecting taxes are then forced to incur high costs in a bid to coerce defaulters to pay up.
The Kenya Revenue Authority (KRA), has had quite some experience with this problem. And to address it, the Authority recently launched an amnesty on rental tax income as highlighted in this article Landlords take advantage of KRA’s #rentalamnesty. This move is expected to encourage the landlords who are individuals to update their tax positions before the deadline expires on 30th June 2016. However, this means that the Authority has chosen to forego quite an amount owed by individuals who get income from rent.
KRA has been facing challenges in trying to collect rental income tax, some include; back taxes from previous years, poor record keeping by landlords, informal practices used to declare rental income and a complex system especially for individual land lords who found computing tax due to be difficult.
Therefore, this move is expected to encourage the landlords who are individuals to update their tax positions.
Rental income in Kenya is taxable as prescribed in the Income Tax Act. Over the years, construction and property industry has been on the rise however revenue earned from the industry has not been matching with the growth due to non compliance of landlords amongst other challenges.
In the 2015/2016 budget read in June 2015, the government outlaid an ambitious budget target of over 2 trillion shillings and part of the measures spelt out to achieve this target was to include residential landlords into the tax net whose annual rental income is below KES 10 Million.
Thus, with effect from 1st January 2016, landlords whose annual residential rental income falls below 10 Million a year will be subject to tax at the rate of 10% on the gross rental income. Withholding tax on the rental income will be 12% of the gross rental income and shall be applicable only to appointed agents.
KRA outlined that the effect of having majority of the landlords duly paying tax on residential rental income would realize an additional 3 billion shillings. This money together with other taxes collected by government would go a long way to ensure Kenyan citizens get improved services and infrastructure from the revenue collected.
In addition to this coming as good news to players in the real estate industry especially following the approval of public Real Estate Investment Trusts’ (REITS), landlords stand to benefit from the amnesty which includes a 100% waiver of:
• Any tax due, interest and penalties on rental income due for the years 2013 and prior.
• Any penalty and interest on rental income due for year 2014 and 2015.
This will incentivize landlords to register and apply for the waiver, thus saving huge sums of money from the waived penalties, back taxes (2013 and prior) and interest.
Therefore, this being similar to a bad debt for profit making entities, how will Kenya’s Government, through KRA, benefit from such a move despite the fact that it amounts to a lot of unrealized revenue?
• Primarily, the biggest gain is in reducing cost of compliance, which has been a major headache for KRA. This basically entails the money used in trying to recover or collect overdue taxes through legal fees, auctioneers and convening tax tribunals.
• The Authority will jump start its new simplified system which will encourage users because the filing processes will be easier thus more tax payers will make payments in good time.
• As a result, more landlords will be added into the system through registration during the amnesty period, this will boost KRA’s revenue targets as they would be able to enforce better compliance from all the registered members.
• Compliance figures from landlords shall increase owing to the simplified mode of computing the tax.
• Reduced cost of compliance since landlords will find it easier to file and make payments for the taxes going forward.
• Administrative processes will also improve and in turn boost publicity for the Authority and good relations between KRA and taxpayers, in this case the landlords.
• Residential income tax will be added as a new and stable revenue stream into the Kenyan economy, as outlined by KRA, the effect of having majority of the landlords duly paying tax on residential rental income would realize an additional 3 billion shillings.
• KRA will be able to save and gain more than it will lose through the waiver of unpaid taxes since 2013 and before. This money together with other taxes collected by government would go a long way to ensure Kenyan citizens get improved services and infrastructure from the revenue collected.
Make sure you take advantage of this waiver. Here is a step by step guide on how to go about registration and application for tax amnesty on rental income.