Taxing landlords won’t raise rent

By Francis Ayieko

Your landlord could be planning to increase your monthly rent under the pretext of complying with the requirement by the Kenya Revenue Authority (KRA) that all landlords pay tax on rental income.

In his budget statement last week, Finance Cabinet Secretary Henry Rotich directed KRA to leverage on technology and map out all rental property in urban areas and put in place a “robust institutional framework for bringing all these landlords into our tax net by December 2013”.

Like it happened last year when then Finance minister Njeru Githae announced that KRA was in the process of mapping out all residential and commercial areas to ensure that all landlords pay tax on rental income, panic has gripped the industry, with tenants fearing landlords might increase rents by up to 30 per cent.

But that ought not be so. The fear is because of misinformation that tax on rental income is a new kind of tax introduced in last year’s budget. Some unscrupulous landlords have been exploiting that to raise rents arbitrarily under the guise of passing the burden to consumers tenants.

Like any other income, rental income has over the years been subject to tax (Pay As you Earn – PAYE). However, many landlords, particularly those in the lower-end of the market, are suspected to be evading it, thus necessitating the taxman to take measures like mapping out all landlords in major urban centres.

‘self-appointed’ estate managers

Tenants in the lower-middle and lower-end of the market, where landlords rarely involve professionals in the management of their properties — they either manage their buildings themselves or hire “self-appointed” estate managers — could start paying higher rents soon.

In an earlier interview, Collins Kowuor, the chairman of the Institution of Surveyors of Kenya, told Home and Away that property owners who have been using professionals to manage their buildings have been faithfully paying income tax, which is usually factored in property budgets and accounts.

INCOME TAX

The budgets they prepare, said Kowuor, show expected gross income and expenses, which include land rates, ground rent, insurance, wages, security, and water and electricity bills.

The income tax, he explained, is calculated as a percentage of the net rental income after subtracting outgoings (expenses) from the gross rental income.

“It needed to be made clear also to the public that it is net rental income that is taxable so that those situations of arbitrary rental increases are avoided,” he said, challenging landlords to maintain proper accounting records to avoid being overtaxed.

How they will be taxed

The Kenya Revenue Authority says it uses a graduated scale to compute the annual tax rates on net rental income. The taxation rates are based on whether the taxable person is an individual or a corporate entity and whether they are resident or non-resident.

For resident individuals, the annual tax rates (on total annual income, including net rent income) are: On the first Sh121,968, you pay ten per cent; on the next Sh114,912, the tax is 15 per cent; on the next Sh114,912, you part with 20 per cent; on the next Sh114,912, 25 per cent; and on all income over Sh466,704, you will pay 30 per cent.

For example, if your annual gross rent income is Sh3 million and your allowable expenses — things incidental to the operations of the subject property such as land rates, insurance, agent’s fees, repairs, loan interest, electricity — amount to Sh365,000, your net taxable income would be Sh2,635,000.

Using the procedure outlined above, this property owner’s total tax payable would be Sh731,632, before deducting personal tax relief.

Installments

KRA insists on such taxes being paid in four installments — on the 20th of the fourth month, 20th of the sixth month, 20th of the ninth month, and 20th of the twelfth month. Any balance of tax is payable by 30th of the fourth month after the end of the accounting period.

It is perhaps because of those intricate details that KRA last year set up help desks in all its offices countrywide to assist landlords comply with the requirement of tax on rental income.

The agency has also been running media campaigns to sensitize landlords on how to calculate the tax. Come, let’s talk has been the campaign motto.

However, one message that must be clear to the public is: It is net rental income that is taxable, so situations of arbitrary rental increases should not arise.