Landlords should take advantage of tax amnesty

Commissioner General Kenya Revenue Authority John Njiraini adressing members of the press during a media briefing on tax amnesty campaign on rental income. PHOTO.FIDELIS KABUNYI

Landlords should consider fully disclosing their tax obligations following the amnesty period by the taxman.

For landlords who owned rental property before passing on, it may be a legal requirement for their estate administrators or legal representatives to account for the tax and apply for amnesty.

Failure to do this may subject landlords to strict compliance audits and tax payment in line with the law. The Kenya Revenue Authority (KRA) recently launched a nationwide campaign on tax amnesty for rental income. This is so as to create awareness and enhance voluntary compliance amongst landlords.

Compliance

The amnesty came about when KRA realised landlords were not willing to comply with rental income tax over fears of being charged huge back taxes after years of non-compliance. The landlords appealed to the Government to grant them an amnesty on the back taxes and also simplify the tax in a bid to reduce the cost of compliance.

Rental income is taxable under Section 3(2) (a) (iii) of the Income Tax Act while rent on non-residential buildings (Commercial) is also taxable under Section 5 and 6 of the Value Added Tax.

The grace period and simplified tax regime on rental income follows provisions of the new Finance Act 2015. According to KRA Commissioner General John Njiraini, the campaign is aimed at bringing on board 20,000 new landlords who will be expected to pay at least Sh3 billion in revenue.

Landlords (for 2013 and before) who take advantage of the opportunity to get their tax records in order will benefit from 100 per cent waiver on principal taxes, penalties and interest. For the past two years, beneficiaries shall enjoy 100 per cent waiver on penalties and interest alone.

It does not end there as landlords who grab the opportunity will not be subjected to tax compliance checks or audit for 2013 and prior, 2014 and 2015 - if they fully disclose undeclared rental income.

Further, where expenditure records are not available, landlords will enjoy a deduction of 40 per cent of gross rental income as expenditure. The condition for tax amnesty qualification is the full declaration of the rental income, online filing of the returns and payment of principal taxes for 2014 and 2015 immediately. According to the taxman, the campaign is designed to give landlords the opportunity to come forward and disclose any unpaid or under paid tax.

Not long ago, KRA reported netting 20,000 landlords into the tax bracket and was targeting to rope in a similar number this financial year as part of the tax amnesty campaign valid to June 30, 2016.

Back taxes

The core argument of the taxman is that the real estate sector has witnessed an annual average growth rate of 7.2 per cent between 2008 and 2014 which is not commensurate with tax revenue.

According to KRA, high cost of compliance, complex tax system, poor record keeping and huge back taxes are among key factors hindering voluntary tax compliance among property owners. Even as the taxman extends the amnesty to some property owners are reading mischief arguing that KRA has cast its net wider and the grace period is meant to trap defaulters.

The amnesty is not the only way KRA seeks to increase the revenue collection as it recently announced plans to appoint agents to collect data relating to buildings and their owners to establish their rental income tax status.

Among those targeted to become agents for the taxman were property management companies who normally collect rent on behalf of landlords. It also targeted to recruit government ministries, departments and agencies that pay rent to act as withholding agents for rental income.

The authority could also appoint independent entities – who are not property agents or government – to collect the data. Separately, there are arguments from some quarters that KRA should be allowed to collect land rates towards roping in rent income tax defaulters.