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July 2015 | Ace Group | :

Ace Bulletin

Residential Rental Income Tax

1

Contents

Residential Rental Income Tax 1

Illustrative Analytics RRIT 2

Increased period for Carry forward of Losses 4

Amnesty for Rental income tax defaulters 5

Enhancing women and youth empowerment

Uwezo Fund

Women Enterprise Fund

Youth Fund

A new tax regime for taxation of residential rental income on a gross basis with an option for landlords to opt for net rental income taxation (as is currently the case).

The New Tax Law Finance Bill 2015 extract “6A. (1) Notwithstanding any other provision of this Act, a tax to be known as residential rental income tax shall be payable with effect from the 1st January, 2016 by any resident person from income which is accrued in or derived from Kenya for the use or occupation of residential property, and which does not exceed ten million shillings during any year of income Provided that this section shall not apply where a person who would otherwise pay tax under this section, by notice in writing addressed to the Commissioner, elects not to be subject to residential rental income tax, in which case the other provisions of this Act shall apply to such a person. (2) The Minister may, by notice in the Gazette, prescribe rules for the better carrying out the provisions of this section.

Who will be affected Landlords owning residential properties and whose annual rental income is below Kshs 10 million to be taxed at 12% of the gross rental income, as a final tax payable monthly. However they have an option to continue to be taxed as is currently based on net income. Effective 1st January 2016

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Residential Rental Income Tax – When it is beneficial ! and When it is beneficial to be taxed on net income

Analytical Illustration

Residential Rental Income Tax

Kshs

Rental income

1,000,000

Residential Rental Income Tax 12 %

120,000

Under Net Income basis

(I)

(II)

(I1I)

Rental income

1,000,000

1,000,000

1,000,000

Expenses Interest

420,000

400,000

450,000

Repairs

120,000

120,000

120,000

Rent and Rates

60,000

60,000

60,000

600,000

580,000

630,000

Expenses as a % age of Income

60%

58%

63%

Net Income

400,000

420,000

370,000

Income tax 30% *

120,000

126,000

111,000

* based on highest rate of tax (I) When expenses are 60% of rental income, taxpayer is indifferent.

(II) When expenses are 58% of rental income, Taxpayer better off under Residential Rental Income Tax.

(III) When expenses are 63% of rental income, Taxpayer better off being taxed on net income.

Conclusion

When a residential landlord has substantial expenses like say when a mortgage has been taken to build or buy the

property and these exceed 60% then it is better to write to the commissioner to be taxed on the current net

income basis.

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Time Limit on Carry Forward of Tax Losses

Prior to 2010 tax losses could be carried forward indefinitely until fully utilized. However, in 2010, the Income Tax Act was amended to limit the loss carry forward period to 4 years such that any tax losses incurred prior to and including the year 2010 could only be carried forward for a maximum of 4 years (For clarity purposes it should be noted that the carry forward period is 4 years whereas the utilization is given as 5 years, i.e. the year in which the loss arises and the next succeeding 4 years of income). Un-utilized losses would be lost unless an application was made and approval received from the Cabinet Secretary for The National Treasury for an extension of time to carry forward such unutilized tax losses. While the law provided for this extension at the discretion of the Cabinet Secretary, it did not specify the circumstances under which it would be granted. Finance Bill 2015 Extract

10. Section 15 of the Income Tax Act is amended— (a) in subsection (5), by deleting the words “five years” and substituting therefor the words “ten years”.

The Change

It is now proposed that the period within which to utilize tax losses is increased from 5 years to 10 years.

Who will be the Beneficiaries?

All taxpayers especially those in a tax loss position and those who have undertaken huge capital expenditure against which investment allowance were granted which resulted into tax losses.

Effective

1 January 2015. Implication

Tax Losses expiring in 2014 and 2016 taxpayers have to write to Cabinet Secretary for extension.

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Tax amnesty for tax payers earning rental income but have not declared it and paid tax thereon In addition to the above new tax regime proposed for residential rental income; the Cabinet Secretary also proposed a tax amnesty for tax payers earning rental income.

The Amnesty

Tax payers earning rental income who have not accounted (fully or at all) for tax on rental income they received in previous years can now pay outstanding taxes under the proposed tax amnesty and be forgiven liability for penalties and interest. Finance Bill 2015 123C. (1) Subject to subsection (2) but notwithstanding any other provisions of this Act, the commissioner shall, with effect from the 1st July, 2015, refrain from assessing or recovering— (a) taxes, penalties or interest thereon in respect of any period before and during the 2013 year of income— (b) penalties or interest thereon in respect of the 2014 and 2015 years of income— where— (i) the income is in respect of gains or profits for the use or occupation of property earned by an individual, and (ii) the returns or amended returns for the 2014 and 2015 years of income are submitted and the tax paid on or before the 30th June, 2016. (2) This section shall not apply in respect of any tax where the person who should have paid the tax— (a) has been assessed in respect of the tax or any matter relating to the tax, or (b) is under audit or investigation in respect of the undisclosed income or any matter relating to the undisclosed income. (3) Where a person has no documentation to support expenditure, such person shall be allowed a deduction of fortypercent of the expenditure.

Who will be the Beneficiaries

Tax payers who have been in the past evading paying income tax while earning rental income, objective is to bring them in the tax net. Period 1st July 2015 to 30th June 2016

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ENHANCING WOMEN AND YOUTH EMPOWERMENT In the 2015 Budget Kshs 25 bn was allocated for youth employment and reengineering of NYS as a vehicle for transforming and empowering youth. Other interventions include:

What is the Uwezo Fund?

The Uwezo Fund is a flagship programme for vision 2030 aimed at enabling women, youth and persons with

disability access finance to promote businesses and enterprises at the constituency level, thereby enhancing

economic growth towards the realization of the same and the Millennium Development Goals No.1 (eradicate

extreme poverty and hunger) and 3 (promote gender equality and empower women). The Fund was launched

by His Excellency the President of the Republic of Kenya on 8th September 2013 and enacted through a Legal

Notice No. 21 of the Public Finance Management Act, 2014, and published on 21st February, 2014.

The Fund seeks to expand access to finance and promote women, youth and persons living with disability led

enterprises at the constituency level. It also provides mentorship opportunities to enable the beneficiaries take

advantage of the 30% government procurement preference through its Capacity Building Programme. Uwezo

Fund, therefore, is an avenue for incubating enterprises, catalyzing innovation, promoting industry, creating

employment, and growing the economy

HOW TO APPLY Eligibility Criteria for Applicants.

Applicants shall qualify for Fund loan application if

(a) For a group

1. Is registered with the department of social services, Cooperatives or the Registrar of Societies

2. Has members aged between 18 and 35 years whereas the women’s groups shall be made up of women

aged eighteen years and above

3. Is based and operational at the constituency it seeks to make an application for consideration

4. Operates a table banking structure or any other group fund structure where members make monthly

contributions according to the groups’ internal guidelines (evidence of monthly contributions shall be a

requirement);

5. Hold a bank account in the name of the group.

(b) For an institution

1. Is a registered entity

2. Has listed youth and women groups within it.

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How to apply

Step 1: Ensure that you meet the eligibility criteria above

Step 2: Fill in an application form (available from the Constituency Uwezo Fund Management

Committee office, CDF Offices or download form from http://www.uwezo.go.ke/download-form

Step 3: Submit the application form together with relevant documents to the Constituency Uwezo Fund

Management Committee office

Step 4: Await notification from the committee

ELIGIBLE AMOUNT

(a) For administration of the Fund:-

1. The access by eligible groups of the Fund, shall be on a first come first served basis, subject to

assessment and approval of the loan, provided that the Committee shall ensure equitable

distribution of funds in the wards

2. Eligible qualifying amounts for a group shall be a minimum of fifty thousand 50,000) and a

maximum of five hundred thousand (500,000) shillings at any one time.

(b) In determining the total amount a group is eligible to receive, the following criteria shall be

applied:-

1. The length of time the group has been in existence

2. The total amount contributed by the group

3. The current status of contribution and

4. The proposed business plan for the loan applied

NB: The eligible amount shall be three times the group savings BUT it shall not be:-

1. Below Kshs. 50,000 (Minimum),

2. More than the amount applied for in the application form and

3. More than Kshs. 500,000 (Maximum)

Womens Enterprise Fund Women Enterprise Fund is a Semi-Autonomous Government Agency in the Ministry of Devolution and Planning (formelry in the Ministry of Gender, Children & Social Development)established in August 2007, to provide accessible and affordable credit to support women start and/or expand business for wealth and employment creation. The various products and services provided to women can be accessed http://www.wef.co.ke/index.php/products-services

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ABOUT THE YOUTH ENTERPRISE DEVELOPMENT FUND The Youth Enterprise Development Fund was established in year 2006 with the sole purpose of reducing

unemployment among the youth who account for over 61% of the unemployed in the country. The target of the fund

is young people within the age bracket of 18 to 35 years who number 13 million. The Fund was gazetted on 8th

December 2006 and then transformed into a State Corporation on 11th May 2007.The Fund’s strategic focus is on

enterprise development as a key strategy that will increase economic opportunities for, and participation by Kenyan

youth in nation building. The government has so far released Ksh. 3.8 billion to the Fund.

In 2008 the Fund developed a 3 year strategic plan to address varied needs and aspirations of the youth, and to

address the challenges it has faced in the past. The Fund is currently working on a 5 year strategic plan in line with

the Medium Term Plan (MTP) of the Vision 2030. It is the Fund’s intention to evolve and be able to meet the dynamic

needs of the youth, who are its raison d’être. The fund is constantly reviewing its operational mechanisms from time

to time in order to make it responsive to needs and expectations of the target clients.

Types of Financing available

VUKA LOAN The Vuka loan is for youth who have existing formal businesses. It is strictly for financing business expansion. This

may include working capital financing and income generating assets. http://www.youthfund.go.ke/loans/vuka-loan/

EASY-YES LOAN E- YES Smart This is a constituency based loan targeting individual enterprises belonging to a group. It targets youth

intending to start or expand own businesses.

CYES LOAN Rausha loan This is a constituency based loan that targets new group projects. It is intended to start off youth who

are venturing into business.

TAKE 254 LOAN Description

Product – Design (Features-terms and conditions eg repayment period, frequency, benefits) Purpose is to provide

working capital for youth in film making business. The loan will be for pre-production, production and post-production.

Approach: The loan will be available to individuals, registered groups, partnerships and companies owned and run by

the youth. http://www.youthfund.go.ke/

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