Housing fund could tip the balance for low income earners

This year’s Finance Bill was packed with far reaching tax measures with a direct impact on both the ordinary Mwananchi and businesses.

The tax measures ranged from the introduction of a 16 per cent VAT on fuel to an imposition of excise duty on mobile money transfer and bank transfers. There was also the introduction of a 1.5 per cent National Housing Development Fund (NHDF) levy.

Little was said about the levy, which has an impact on majority of Kenyans. The Finance Act made an amendment to the Employment Act, 2007 creating the NHDF which will be funded through a 1.5 per cent deduction from employees and a further 1.5 per cent contribution from employers that was capped at Sh5,000. The levy is designed to address the country’s housing shortage.

It is also meant to address the poor quality of housing, especially among low income earners.

It is anchored on President Uhuru Kenyatta’s Big Four Agenda which has Affordable Housing as one of the pillars.

Projections by the State Department for Housing and Urban planning indicate the country has a housing deficit of 1.8 million houses. The Government plans to deliver over 500,000 homes over the next five years financed from the Sh5b to Sh6b collected per month through the NHDF levy.

Fund regulations

To enable the operationalisation of the levy, which is scheduled to take effect in January 2019 the Cabinet Secretary for Transport, Infrastructure, Housing and Urban Development released the draft Housing Fund Regulations, 2018.

The regulations categories three beneficiaries; Kenyans earning a monthly wage below Sh14,999 who will be eligible for the Social Housing Scheme, those earning wages between Sh15,000 and Sh49,999 who will be eligible for Low Cost Housing while those earning between Sh50,000 and Sh100,000 will be eligible for Mortgage gap Housing.

In essence the first category is rent based housing while the second category allows those eligible to pay rent towards owning their allocated house. Almost by default, the regulations create a fourth category for those earning more than Sh100,000 per month who will be barred from benefiting from the scheme and will be allowed to withdraw their savings with interest after 15 years or upon retirement.

Under the regulations, the interest rate due will be determined on an annual basis by the National Housing Corporation (NHC). Self-employed persons may opt into the scheme by contributing a minimum Sh200 per month, Sh100 of which will be used for administration of the fund.

Eligibility will however be restricted to first time home owners. Those falling in either of the three categories may also access their funds after five years provided the funds are used to offset housing loans, secure a mortgage or develop a house.

Members may also apply for loans at an interest rate cap of 7 per cent. Those who apply for the housing are also entitled to a 15 per cent tax relief on gross earnings of up to Sh108,000.

Despite the accruing benefits, the regulations should be amended further to cater for various sections of the population. In essence, the AHP is meant to benefit low income earners most of whom are self-employed and can only participate through voluntary contributions at a minimum of Sh200 per month. The allocation of half of this contribution (Sh100) to fund management and administration would however dissuade self-employed Kenyans from participating.

Exempt foreigners

The regulations also fail to make provisions that exempt foreigners working in the country on short-term contracts and are unlikely to extend their stay. The most notable concern is the likely double taxation of those earning over Sh100,000 and those who already own a home as they are not eligible for tax relief and will face additional taxation should they opt to withdraw their funds in cash after 15 years. For this category of Kenyans, the regulations should be amended to cede tax benefits especially at the point of withdrawal from the fund.

Although no tax incentive is due to employers, it is noteworthy that if the regulations are passed, employers should be able to claim the contributions on behalf of employees as ‘staff cost’ which are allowable for corporation tax purposes. This will however not benefit loss making or tax-exempt employers who cannot claim this deduction.

If well managed however, the fund could tip the balance for millions of Kenyans who cannot afford decent housing. As the fund grows, benefits such as low mortgage rates will compel commercial banks and other mortgage providers to lower interest rates.

Ms Muigai is an Associate Director and Kennedy Osore is a Tax consultant with PwC Kenya’s Tax department dealing with Employment and Expatriate Taxes.

judy.muigai@pwc.com  kennedy.osore@pwc.com