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Increase rents at your own peril

By writes MORRIS ARON | June 21st 2012

Compliance of Income Tax Act by landlords should not, in  any manner imaginable,  translate to rent increase, writes MORRIS ARON

During the Budget statement last week, Finance Minister Njeru Githae made a routine directive requiring landlords to comply with income tax requirements.

By tightening the loopholes against landlords the Treasury is looking to raise a further Sh90 billion.

What Githae did not envisage at the time of making the statement is the gravity and the implications of intentional misinterpretation of the ‘borderless’ directive.

According to the directive, landlords earning more than Sh10,000 from rental houses — both commercial and residential — will be charged income tax at the prevailing Pay As You Earn (PAYE) rates.

Barely a day after the budget statement, unscrupulous landlords sent notices to tenants of commercial and residential properties — especially in the lower end of the market with the intention of increasing rent due to ‘an increase in tax.’

To show the level of discord in the real estate industry as a result of the directive, it took the Institution of Surveyors of Kenya (ISK)—the body that brings together estate managers, valuers and surveyors, — to disagree with landlords on increasing rent due to the directive.

?“We can confirm than some landlords have already issued notices to tenants with a view of increasing rent citing income tax. This has created panic in some areas,” said Collins K’Owuor, the chair of ISK.

?“We wish to categorically state that this is wrong as income tax is not a new cost but one that has always been there only not fully adhered to.”

?But even as ISK takes the people who employ them head on, in another corner—at the Consumer Federation of Kenya (CofeK), it  was more than seething with concerns over the directive.

For a lobby group that started as an umbrella body of mostly tenant residents’ association, the chair Stephen Mutoro did not mince his words over the issue.

Rent rows

“To increase rent  at this time when the cost of living is straining many people is to say the least — suicidal,” said Mutoro.

“In fact as a matter of urgency, there is need for a meeting between all the stakeholders. In any way, tenants can assist KRA recover tax more than the landlords can.”

Analysts say that if rent for commercial and residential property increase, inflation is bound to assume an upward swing—as housing is a major component in calculation of inflation.

In addition, property analysts say, mortgage loan and rent defaults will increase as many will not be able to pay over and above what they are currently struggling to.

Precarious situation

Property analysts say that the development is bound to result in social unrest and a rise in rent defaults as tenants—comprising of 80 per cent of urban residents protest the move.

Increase in rent in low-income neighbourhoods could lead to stand-offs, social unrests, riots and even death in extreme cases.

Industry players say that from a policy perspective, the Treasury appears to have been self-contradictory—at least on surface on the misinformation of Githae’s statement on the part of landlords.

On one hand, an increase in rent for commercial and residential properties will result in an increase in the cost of basic commodities as manufacturers pass on the additional cost to the end consumer.

This goes contrary to what the main focus of the Budget statement was—to ease the cost of living by reducing inflation, stabilise the shilling and reduce interest rates.

The Treasury’s overall policy appears disjointed as on the other hand and in the same Budget? statement, it sought put more people into business by zero rating mitumba clothes and increasing the level of development funds for the youth and women.

“The implications of misunderstanding of the directive is pretty grave and cuts across many economy strata than was originally envisaged,” said Mutoro.

Then there is the issue of long-term leases. Industry players say that in the high-end areas, tenants tend to lease for periods of six months, a year or more.

“It will almost be impossible to increase rent without going into the legalities of changing lease agreements,” said Charles Waweru, an independent property analyst.

What has left many wondering is the way landlords have taken up the issue .

Income tax is something that any qualified estate manager will tell you does not result in an increase in rent and advise the property owners on the same,” said Stephen Omengo, a valuer with Tysons, a property company.

According to K’Owuor, income tax on rent is like any other income tax that has always been there.

“The Budget statement merely emphasized what is there and which many have been taking for granted,” said K’Owuor.

Wrong assumptions

“The misinformation that the cost now needs to be passed to tenants is plain and simple — wrong.”

To illustrate the point, if a landlord who is getting a gross rent income of Sh12,000 with property expenses(maintenance and repairs and other costs)—of Sh2,000 the, net rent due for tax will be Sh10,000. That if taxed at ten per cent leaves the landlord with Sh9,000.

The same applies to any investor who receives income and who is taxed like any other individual who gets some source of income.

Since Githae directed for compliance with the income tax requirement, tenants have put landlords in sharp focus as all the blame on non-compliance lies squarely with the landlords.

Quacks’ contribution

And it is not only the landlords. Professionals in the real estate industry such as agents who are quick to collect rent and not advise the landlords on income tax have also been blamed for fuelling the miscommunication.

“If a property is well managed by a professional, such cases of miscommunication should not arise,” said Omengo.

“The problem is we have a number of quacks in the real estate industry.”

But as the property management continues with the long-drawn talk of ‘streamlining the industry,’ some players such as CofeK are already thinking of next course of action.

“We have the option of going to court to have the effective date deferred until all the parties are brought together and the structures including the mapping figured out,” said Mutoro.

“The other option is to lobby the Members of Parliament —as you know a number are struggling with their mortgages  — to block the passage of the Bill.”

It is perhaps the growing sentiment against any increase in rent that saw Finance Minister issue a stern warning to landlords on Monday.

“Increase rents at your own peril,” warned Githae.



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