17. Income Tax Act (Cap 470)

The law provides for assessing, charging and collecting income tax, the income to be charged and the administrative and enforcement provisions of tax collection.

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The statute seeks to make provisions for the charge, assessment and collection of income tax; for the ascertainment of the income to be charged; and for the administrative and general provisions relating thereto.

· Section 3 of the Act is the charging section which requires payment of tax on income including rental income, capital gains tax, and corporate tax.

Residential Rental Income Tax

· Section 6A of the Income Tax Act (introduced through the Finance Act 2015 and which became effective 1st January 2016) provides for a monthly Residential Rental Income Tax.

· The Monthly Rental Income Tax is a final tax charged at a flat rate of 10% on gross rent received per month, payable by resident persons (whether individual or company) on rental income earned for the use or occupation of residential property where the rent income is between Ksh 288, 000 to 15 million per annum (equivalent to Ksh 24, 000-1,250,000 per month).

· No expenses, losses or capital deduction allowances are allowed for deduction from the gross rent.

· The rental income must be filed online via iTax on or before the 20th of the following month such as where rent is received by January, the returns for the same must be filed on or before 20th of February.

· Landlords/property owners who earn a rental income below Ksh 288, 000 annually (Ksh 24, 000 monthly) or above Ksh 15 million per year are required to file annual income tax returns and declare the rental income alongside their other incomes for the particular year.

· Once this tax is paid, it is a final tax and therefore landlords are not expected to declare the same in their annual income tax returns.

· Persons exempted from this Monthly Rental Income Tax are: non-residents, landlords earning more than Ksh 15 million annually, and taxpayers who wish to remain in the normal tax regime of filing annual income tax returns on the rental income and who may choose to do so by writing to the Commissioner of Domestic Taxes, KRA.

· On the other hand, the rental income under the normal tax regime is calculated under an individual graduated scale or a corporate tax rate of 30% of the total rent received for the year. Section 15 of the Income Tax Act however allows for deduction of expenses incurred to generate the said rent.

Capital Gains Tax (CGT)

· Capital Gains Tax was reintroduced in Kenya on 1st January 2015 (through the Finance Act 2014 which amended the Eighth Schedule of the Income Tax Act), following its abolition 30 years before (in 1985).

· Sections 3(2)f, 34(1)j, Paragraph 2 of the Eighth Schedule of the Income Tax Act (Cap 470) provides for imposition of Capital Gains Tax (CGT) as a final tax levied at 15% of the net gain[1] arising from proceeds for transfer of property including land and buildings. The net gain is obtained by deducting the acquisition cost (initial buying price) and related incidental costs of the transaction from the total sale proceeds. Some of the allowable expenses (incidental costs) that are deducted from the sale proceeds for purposes of calculating the net gain for purposes of CGT are: loan or mortgage interest; legal fees; costs of enhancements; valuation costs and advertising costs.

· The Capital Gains Tax is due on or before the transfer of the property but no later than the 20th day of the month after transfer. The payment is initiated online via iTax.

· The process of payment of CGT is done through presentation of a completed CGT 1 form by the taxpayer/seller to KRA accompanied by a copy of the sale/transfer agreement, proof of incidental costs related to the acquisition and transfer of the property, copy of title deed or ownership document for the property, report from a registered valuer for property transactions between related parties, and any other document that the Commissioner of Taxes may require.

· There are some transactions that are however exempt from payment of CGT. These include: transfer of assets between spouses or to immediate family, transfer of property only for the purpose of securing a debt or loan, transfer by a personal representative to a beneficiary under the law of succession, transfer of assets between former spouses upon divorce or judicial separation, transfer of assets to a company where spouses or spouse and immediate family have full shareholding, and a private residence if the individual owner has occupied such residence continuously for the three-year period immediately prior to the particular transfer.

· The Kenya Revenue Authority (KRA) in September 2019, introduced additional requirements to the process of property transfer by requiring verification and approval of all transactions declared as exempt from Capital Gains Tax.

· The effect of the introduction of iTax (online) payment of CGT was that the I-Tax system would not permit the payment of Stamp Duty on a transfer unless and until the CGT was also paid. In effect therefore, and as a matter of practice, there was a requirement on a property purchaser to present an approved CGT acknowledgement slip as proof of payment of CGT or exemption (if any) before one could make payment for stamp duty to enable transfer of their property.

· Notably, CGT payment is an obligation of the seller, whereas stamp duty payment is an obligation of a buyer/purchaser. In effect, therefore, a purchaser would have been held hostage by the failure of the seller to honour their obligation of paying CGT and therefore delay the transfer process.

· Upon legal challenge, the High Court in Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR made a declaration that the requirement by KRA for simultaneous payment of both stamp duty and CGT by a charge pursuant to statutory power of sale was illegal and made an order compelling KRA to allow payment of stamp duty on an instrument of transfer without requiring payment of CGT or an acknowledgement number for payment of CGT.

· This decision was affirmed on appeal in Kenya Revenue Authority v Kenya Bankers Associations [2020] eKLR, Civil Appeal 213 of 2018, where the Court of Appeal held that to require a purchaser to pay CGT first without ascertaining whether there is in fact a capital gain is unreasonable and unfair. The court also held that a bank as a chargee is under no obligation to pay capital gains tax when exercising a statutory power of sale since it is not a proprietor of the charged land but rather only has proprietary rights over the charge. The appellate court was of the view that even in executing a transfer following exercise of statutory power of sale, the chargee/bank is usually but a nominee and never the owner/proprietor of the property as to be liable to pay stamp duty.

· Following the Court of Appeal decision, KRA published a Notice dated 23rd March 2020 dispensing with the requirement to present a CGT acknowledgement slip before processing of stamp duty payment.

· Another consequence of this directive is that CGT can now be paid after transfer/registration of property transfer, but on or before the 20th day of the month after that when the transfer has been completed.

· Section 20(1)c of the Income Tax Act exempts real estate investment trusts from income tax except for the payment of withholding tax on interest income and dividends as a resident person as specified in the Third Schedule of the Act.

· Importantly however, the Kenya Revenue Authority is yet to publish regulations that will formally exempt subsidiaries of real estate investment trusts (REITs) from income tax to accord with the said section 20(1)(c) of the Income Tax Act despite the move to exempt the operating units of the REITS starting three years ago. Accordingly, these regulations need to be fast-tracked to enable REITS to take advantage of this tax incentive.

· Section 20(1)d of the Income Tax Act, introduced in November 2019 vide the Finance Act No. 23 of 2019, exempts investee companies of Real Estate Investment Trusts (REITS) from income tax.

· The above tax exemptions are incentives designed to encourage the growth of real estate investment funds which allow the public to gain exposure to the property market without requiring large cash investments. The funds issue units which trade like stocks and break down ownership of the underlying assets to enable minimum investments of a few thousand shillings.

· Section 30A of the Act (introduced through amendments in 2018) provides for affordable housing relief for a year of income to residential individuals eligible for and who have applied for or are awaiting allocation of a house or those saving for a purchase under the affordable housing scheme. The effect of the tax relief is to reduce the amount of tax otherwise payable by a purchaser and therefore serves to avail more disposable income for the taxpayer/purchaser thereby increasing demand.

· This tax relief is however only granted once. Under section 3 of the Third Schedule under (Head A-Resident Personal Relief), the affordable housing relief is set at 15% of the employee’s contribution but shall not exceed Ksh. 108, 000 per year.

· Section 59 of the Act empowers the Commissioner of Domestic Taxes to issue a notice to an occupier of premises to furnish the Commissioner with a return containing the name and address of the owner or lessor of the premises; and a full and true statement of the rent of any consideration payable for the said occupation. These powers certainly help the revenue authority in assessing the tax to be assessed against the owner/lessor of the premises especially where they are under-declaring or failing to remit taxes.

· Some of the exemptions to payment of income tax stipulated under Part 1 of the Act include: income from the National Housing Development Fund (section 57); and the amount withdrawn from the National Housing Development Fund to purchase a house by a contributor who is a first-time homeowner (section 59).

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[1] This CGT rate of 15% of net gain became effective 1 July 2022 following the enactment of the Finance Act 2022 which increased it from the prevailing rate of 5%.