By Collins Kowuor

When the Minister for Finance announced in his budgetary statement this year that rental income would be taxed, there was confusion and pandemonium.

Investors were concerned their income would diminish while tenants were worried rents would increase. The confusion was necessitated by the fact that most people thought it was new tax. No, taxation of rental income has been in place since 1974 under Income Tax Act; read section 3(2) (a) (iii) of the Act in tandem with section 6(1).

‘Tax’ is a word that came from Latin. It means a financial levy (as a percentage-tax rate) upon persons by State and failure to pay is punishable by law. A good tax system is efficient (collectible at lowest cost possible), simple (easily understood in terms of how much, who, when and where to pay), predictable (tax rates should not vary often), and fair (based on ability to pay and benefits receivable).

Tax systems can be progressive (rate increases with income level), regressive (rate decreases with income level), proportional (rate fixed irrespective of income level), and lumpsum (fixed amount irrespective of income level).

So much for that, what do we know about taxation of rentals in Kenya?

Our tax rates depend on person (individual or company), and residency (resident or non-resident). Rate for resident individuals is graduated from ten to 30 per cent of net annual rental (after subtracting allowable expenses) summed with other income that is taxable. Resident companies and deceased landlords pay flat rate of 30 per cent of the net annual rental, while non-residents pay same flat rate, but on gross rent (without subtraction of expenses). It is the administrator of the estate of a deceased who is liable for payment.

Property investors should always keep building plans, leases, title documents, occupation certificate, loan agreements, rent receipts, of paid expenses, rent schedule and other property information. In short, keep very good records about the property. Allowable expenses include land rates, property insurance, loan interest, water bills, land rent, agent’s fees and maintenance. Simply put, the expenses should be related to production of the rentals.

How much tax is payable by the three groups mentioned above? Assuming rentals are the only source of income, an annual rental of Sh2 million (with allowable expenses totaling Sh400,000); resident individual may pay a tax of Sh407,188 and resident company Sh480,000, while non-resident may pay Sh600,000 in taxes.

Many may be asking what happens to those who have not been paying. Sadly, there is no amnesty currently for waiver of penalties. However, one can apply to the Commissioner for consideration on case-by-case basis. KRA may need to borrow a leaf from the local authorities and apply to the minister for Finance for approval of amnesty just like local authorities do to minister for Local Government on land rates. This may encourage more and quicker compliance.

There is difficulty in collecting the correct property information, integration and updating of the information.

KRA recently advertised for development of a GIS (Geographic Information System) solution. It is encouraging that Government has begun to appreciate the central role of cadastre (that is a comprehensive register of property detailing precise location, ownership, tenure, dimensions and area of the property) in provision of services.

Piecemeal efforts on GIS may lead to redundant, costly and outdated information. To be effective, major bodies in the sector should be involved and integrated. Integrate those in charge of cadaster, building plans, registration of persons, housing data, title registration, revenue collection, among others.

Many things happen as the information grows stale if not updated — new buildings come up, turnover of tenants and other property related changes take place. New laws and institutions are also emerging. Lessons from a few countries such as South Africa, China, Sweden and Italy may be useful for our country in implementation.

It is not the collected information per se, but updating of the information that is critical.

The writer is the Chairman of Institution of Surveyors of Kenya (ISK)