The Law
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 also taxable under Section 5
and 6 VAT Act Cap 476.
What is Taxable?
All rent, premium or any other consideration for
use or occupation of property.
Rates of Taxation
Taxation rates are dependent on whether the taxable
person is an individual or corporate entity and whether they are resident or
non resident
1.
For resident individuals, the annual tax rates (on total annual income
including net rent income) are as follows;
On the first Kshs. 121,968
........................10%
On the next Kshs. 114,912
.......................15%
On the next Kshs. 114,912
.......................20%
On the next Kshs. 114,912 .......................25%
On all income over Kshs.
466,704..............30%
Note: The above
scales are referred to as “graduated”
2.
For resident companies the net annual income together with other incomes,
if any, are taxed at the flat rate of 30%
3.
For, non-residents (for tax purpose) there is only withholding tax @ 30% on
gross rent and which then is a final tax, they are not allowed to claim any
expenses.
4.
For partnerships, only a single rent declaration is submitted but the partners
will be taxed on their respective shares of the rent income.
5.
Estate of deceased landlords.
The net rent income (supported by
rent schedules) accruing to the estate of deceased is chargeable at resident
corporate tax rate of 30%.
6.
VAT on non-residential Rent(Commercial rent)
This is charged at 16% as it is not exempted by the
3rd Schedule of The VAT Act.
What You Need To Do To Comply With the Law
1. Obtain Personal
Identification Number (PIN) if you do not have one yet to enable you to
transact any business with KRA including filing returns and paying taxes. KRA
issues PIN on-line. To apply for PIN, please visit KRA online services at; www.kra.go.ke
2. Taxes are paid in
four instalments on the 20th of the 4th month, 20th
of the 6th month, 20th of the 9th month and 20th
of the 12th month of the accounting period. Any balance of tax is
payable by 30th of the fourth month after the end of the accounting
period.
3. Proper records
should be kept for all your rental property indicating the following;
- Land
reference(LR) number
- Year
of construction
- When
first let and certificate of occupation
- Cost
of construction
- Building
plans
- Loan
agreements
- Number
of rentable units and rent per unit
- Rent
received and rent receipt books
- Related
expenses (invoices and receipts to support expenses)
- Lease/tenancy
agreements
- Bank
accounts for the rental income
- Rent
schedules (income and expenditure account)
4. At the end of the
accounting period;
a)
Income Tax on Rental Income
·
- Prepare
rent schedule for all let property showing; number of property, rent
received per property, gross rent received, and all expenses incurred per
property.
- Deduct
only allowable and supported expenses to arrive at the chargeable rent.
Examples of tax computations are provided herein.
- Complete
tax return and attach rent schedule in support thereof. When you are
filing return online, enter the details of the rent schedule as provided
in the sheet available with the online tax return form. The sheet is
provided when you click in the space to declare/enter taxable rent
profit.
- Submit
self-assessment return within six months after the close of the
accounting period.
b) VAT on
Commercial Rent
Prepare VAT Account showing the
VAT charged to tenants (output VAT) and allowable VAT on purchases (input VAT)
incurred in the month.
·
Complete
VAT return and submit together with payment by 20th day of the
following month.
·
Note: Receipts/invoices issued to tenants are supposed to show the VAT
charged and shall be ETR generated.
·
Note the
following about online filing of the tax returns:
·
You are
encouraged to file your tax returns online. For details on how to file your
returns online, please visit the KRA online services at www.kra.go.ke.
·
To file
online, you must register with KRA online services.
Examples of a Rent Schedule
Example 1: Resident Individuals
a) Mr. Landlord
has two properties from which he is earning rents as follows:
- Property
A with 5 units, at Kshs. 20,000 per month per unit
- Property
B with 10 units at Kshs. 15,000 per month per unit
b) All units were
occupied by tenants throughout the accounting period of 2010.
c) During the
accounting period, he incurred the following expenses;
-
- Land
Rates – Kshs.10,000
- Property
insurance – Kshs. 20,000
- Agents
fees – Kshs. 30,000
- Repairs
– Kshs. 160,000
- School
fees – Kshs. 120,000*
- Loan
interest – Kshs. 85,000
- Electricity
– Kshs. 60,000
- During
the year, his principal loan repayment amounted to Kshs. 250,000**
d) His accounting period
ends on 31st December, 2010.
e) Computation of
taxable rent income is as follows;
Gross Rent income for the year:
Property A - 5 units
x Kshs. 20,000 x 12 months 1,200,000
Property B – 10 units x Kshs.
15,000 x 12 months 1,800,000
Total Rent income in Kshs
3,000,000
Less: Allowable expenses (Kshs.):
Land
Rates
10,000
Insurance
20,000
Agent’s fees
30,000
Repairs
160,000
Loan
interest
85,000
Electricity
60,000
365,000
Net taxable rent income
(Kshs.)
2,635,000
Notes:
* School fees is a personal
expenditure that is not allowable deduction.
** Principal Loan repayment is a
capital item and not an allowable deduction
f) Computation
of Mr. Landlord’s tax for the year (on the assumption that he does not have
any other incomes):
Taxable annual net rent income
for the year - Kshs. 2,635,000
The first Kshs. 121,968 @
10% 12,197
The next Kshs. 114,912 @
15% 17,237
The next Kshs. 114,912 @
20% 22,982
The next Kshs. 114,912 @
25% 28,728
The balance Kshs. 2,168,296@
30% 650,488
Total
tax Payable
731,632
Less: Personal
relief
13,944
Net tax
payable
717,688
g) If Mr.Landlord had
paid 4 equal instalments of Kshs. 150,000 each for the year totalling Kshs
600,000 then he would have a balance of Kshs. 117,688 to pay by 30th April
2011. However, if he had not paid any instalments in advance, then the entire
of the Kshs. 717,688 would be payable by 30th April 2011 plus penalties and
interest for failure to pay instalments when they are due as per the law.
Example 2: Resident Limited Company
a)
In the above case, if the landlord was a resident limited company say M/s
Landlord Ltd, then the net rent as computed above would be taxed at the
corporate rate of 30% and all other matters remaining the same except
that there is no personal relief.
b)
Therefore, tax computation will be as follows;
Net taxable rent (Kshs.)
2,635,000
Corporate tax @
30%
790,500
Less: instalment taxes
paid
600,000
Balance due by 30/4/11
190,500
Example 3 – Non Resident Persons
a)
For non-resident persons, the gross rent income is subjected to withholding tax
at 30%, which is a final tax.
b)
Therefore, tax computation will be as follows;
Gross rent income
(Kshs.) 3,000,000
Withholding tax @
30% 900,000 (Please
note this is a final tax)
5. Kenyans in
the Diaspora
Any Kenyan living out of the country but own
property in Kenya must pay tax in Kenya on the rent earned. If non-resident (as
defined in Section 2 of the Income Tax Act Cap 470), such rent is subject to a
withholding tax at 30% of the gross which is then a final tax. However, if
resident the rate of tax shall be at graduated scale on net rent income (see
example 1).
6. Further
Clarification
For further clarification, please contact Mr.
David Gichohi on Tel. 020281-6095, Pentronila Muthenya 020-2813086
0r Call Centre Tel. 020 4999999. You may also visit the Real Estate
and Rental Income Help Desk at Times Tower Building, Ground Floor or your
nearest KRA Station for assistance. You can also communicate with us via email;
rentalincome@kra.go.ke
Note that the Income Tax Act Cap 470 and VAT Act
Cap 476 of the laws of Kenya are available on KRA website at www. kra.go.ke
Disclaimer: Taxpayers are notified that if
there is any inconsistency between the provision of the Revenue Laws and the
information contained herein, then the Revenue Laws shall prevail.
