One thing the government has been doing since Kibaki’s time is to expand tax base in order to collect more and more of the much needed revenue, and one such new base is house rent. Starting January this year, landlords have been required to pay tithe (10% of gross income) to KRA as residential rental income tax as long as such gross rental income does not exceed Kshs 10 million a year – and that means almost every landlord charging shs 83,000 or less per month on rent is expected to comply.
The residential rental income tax is a tax that came into effect in January 2016 immediately the Finance Act 2015 became operational. A new Section of the Finance Act 2015, Section 6A, was introduced by the Act and provides for a simplified tax regime on rental income. According to the Act, the tax to be known as residential rental income tax shall be payable by any resident person from income which accrued in or was derived from Kenya for the use of residential property and which does not exceed ten million shillings (Kshs. 10 million) during any year of income.
The residential income tax is due every 20th of each month, meaning, landlords who collected rent for January 2016 were expected to have paid their 10% residential income tax by February 20th 2016. Now that we are in April 1st (and this is not an April fool’s’ day story), many landlords are waiting to collect rent on 5th of this month, thus they will be expected to pay their residential income tax by April 20, 2016. The many landlords who have not complied or are planning not to comply with this requirement have set themselves up for punitive penalties and interests that KRA will inflict on them in due course. These punitive penalties and interests are specified in the Income Tax Act.
The introduction of residential income tax does not however mean that the landlords are to increase your monthly rent. If you have been paying shs 25,000 every month long before January 2016, the fact that now your landlord is supposed to pay a residential income tax to KRA does not mean that your rent should go up by e.g. 10%. No. Do not agree to that whatsoever. The residential income tax is a tax regime that is imposed on all rental incomes, that is on monies received as rent. It is like tithe actually (10%); you do not expect your employer to decrease your salary because he got saved and now is expected to pay tithe to the church calculated from his business gross income.
If you happen to have a landlord who has difficulties understanding financial jargon, then it would be great if you took some time to explain to him or her this new requirement and encourage him or her to pay the required residential income tax, and the math is not difficult really. According to information availed to us from KRA, “the residential income tax shall be charged at a rate of 10% on gross rent received on monthly basis.” And “No expenses shall be allowed for deduction.” The 10% tax will be final meaning that landlords who have paid the tax will not be subjected to any further taxation on residential income.
Finally, it is important to emphasise that the residential income tax is not limited to landlords renting their premises for home residence, but also to landlords renting their premises for businesses and/or any other use of residential property. There are many questions that have been asked regarding the filing of the residential income tax and I will cover these questions in my next article on the same subject.
Happy tax compliant April everyone.