Which is better: normal tax or residential rent tax?
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
30 December 2018
Thomas Sumba says that he took a cooperative society
(SACCO) loan and used the money to develop some rental houses. He hopes
to collect about Sh100,000 in rent every month. He is wondering how to
“bring KRA on board for tax” and how the tax on rent is paid.
He writes: “how does the 10% tax operate? When is it
payable? Do I have to pay if I do not receive full occupancy?”
Let’s start with the easy questions. Rent from
residential houses can qualify for the special flat rate tax of 10% if
the landlord does not collect more than Sh10 million per year.
In such a case, the landlord files monthly returns to
KRA showing the actual amount collected and details of the tenants. If a
house is not occupied, then no income is received, hence no tax is
payable.
The tax return forms are easily downloadable from
KRA’s I-Tax online platform. The deadline for filing and paying the tax
is the 20th day of the following month. For example, for the
rent collected in December 2018, the returns and payments must be done
before the 20th of January 2019.
This 10% tax simplifies the filing process since no
complicated calculations of profit are required – you just work out 10%
of the rent. However, for a landlord like Thomas who developed the
houses through a loan, there is a chance that he may not making any
profit from the houses.
Thus, if he was in the normal income tax regime, he
wouldn’t be eligible to pay any tax. If that is so, I would discourage
such a landlord from signing up for the 10% residential rent income tax.
Unfortunately, Thomas has not given enough
information to work out whether he is making any profit. Nevertheless,
we can do an illustrative calculation. With a monthly rent of Sh100,000,
the construction cost might be somewhere around Sh10 million.
I assume further that Thomas had half of this amount
saved and he only took Sh5 million loan from the cooperative. These
institutions usually lend money for three years at 12% interest per
annum. Thus, the repayments would be about Sh166,000 per month.
In the first month, Sh50,000 will go to interest and
the balance to principal payment. That is; the houses that are earning
Sh100,000 will incur a finance cost of Sh50,000. Assuming there are not
other costs, it means that the profit is Sh50,000.
Normal income tax for this profit is 30%; that is
Sh15,000. However, normal income tax is payable annually; so, Thomas
would need to work out the total annual rent minus the total annual loan
interest to get the profit.
If this is how Thomas has financed his development,
then he is better off on the 10% tax where he pays Sh10,000. But I must
emphasise: this is not a recommendation! It is just an illustration of
the considerations to be made.
Finally; it is important to note that, with kind of
financing, the landlord is making a profit yet his rent (Sh100,000) is
not enough to pay the loan installments (Sh166,000)! He has to top up
Sh66,000 from other sources.
 |
 |