High noon for errant property owners

By Jackson Okoth

NAIROBI, KENYA, Nov. 22 - The Kenya Revenue Authority (KRA) will require all tenants to pass on vital information concerning their landlords to the Authority.

These details are to be contained in the electronic annual tax return forms already designed by KRA. The idea is to enable the taxman collect tax on rental income from landlords who have hitherto escaped their radar.

“We already have an electronic tax declaration system that will capture data from tenants. The information collected will enable us build a profile of incomes earned by landlords,” said John Njiraini, the KRA commissioner general.

He made these remarks on Wednesday during a forum on voluntary tax compliance in real estate, organised by the Authority in partnership with Housing Finance and Kenya Private Developers Association (KPDA).

The high level meeting, which attracted chief executives and business owners of the top 200 real estate firms, discussed ongoing tax initiatives in the real estate business.

While rental income has been subject to tax as income tax since 1973, lack of data on real estate business has hampered efforts by the taxman to collect its dues.

“The property market is growing rapidly and has bigger gains as property prices double after every few years. We need to target this area for purposes of collecting revenue,” said Njiraini.

Hike rents

With KRA preparing soft data on landlords, fears have been expressed that this move could see some property owners hike rents on residential and commercial properties.

“In the short term, there are landlords or who will increase rents, especially for middle and low-income housing segments. But in the long run, it will be unsustainable to do this,” said Frank Ireri, the Managing Director of Housing Finance.

Taxpayers are required to declare their gross rent income, but only pay tax on net income.

This means that property owners should first deduct all expenses — such as repairs, maintenance, caretaker costs, land rates, insurance, land rent, agent fees and grounds men.

Section 15(3) (a) of the Income Tax Act allows property owners to deduct interest on cash borrowed and used to put up the rental property. The law also allows landlords to deduct cost of alterations made to the property. Any Kenyan living out of the country but owns property in Kenya must also pay tax on the rental income.

A real estate developer who is in the business of selling property should pay tax on their net profit after deducting cost of land, professional fees to quantity surveyors, architects, civil engineers and electrical engineers, material costs, labour, advertising, marketing and other administrative costs.

Encourage compliance

Alive to the fact that not all landlords will play ball, KRA has put in a policy document to encourage voluntary compliance, with concessions given to those who comply.

Available figures indicate that some Sh200 billion in tax claims is tied up within the court system, a fact that prompted KRA to seek for alternative dispute resolution mechanisms.