The-Accountant-Sep-Oct-2017-Final

Finance and investment
IS THE LAW ON TAXATION
OF RESIDENTIAL RENTAL
INCOME VAGUE?
By Ernest Muriu
Section 6A imposes tax on
income whereas section 34(1)
(k) states the tax shall be
computed upon gross rental
receipts of a person chargeable
to tax under section 6A.
As a background, Section 3 of the Income
Tax Act is the section that brings to tax
charge all income accrued in or derived in
Kenya. Further, rental income is broadly
brought to charge by Section 3 (2) (a) (iii)
and it states:
‘Subject to this Act, income upon
which tax is chargeable under this Act is
income in respect of gains or profits from
a right granted to another person for use
or occupation of property’;
Section 6A. (1) of the income tax act is
the specific provision that imposes Income
Tax on residential rental income and it
provides that
Notwithstanding any other provision
of this Act, a tax to be known as residential
rental income tax shall be payable with
effect from the 1stJanuary2016 by any
resident person from income which is
accrued in or derived from Kenya for the
use or occupation of residential property,
and which is in excess of one hundred and
forty-four thousand shillings but does not
exceed ten million shillings during any
year of income.
Section 34(1) (k) on the rate of tax,
provides that subject to this section tax
upon gross rental receipts of a person
chargeable to tax under section 6A shall be
charged at the resident rate specified under
the Third Schedule for that year of income
Section 34(1) (k) appears to contradict the
provisions of Section 6A. (1) Why do I say
so?
1. Section 6A. (1) imposes tax only on
income; whereas
2. Section 34(1) (k) applies the
appropriate tax rate on gross rental receipts
3. Nowhere does Section 6A. (1) define or
state income to mean gross rental receipts.
4. Nowhere does section 2 of the act,
which deals in Interpretation, provide that
income under section 6A to mean gross
rental receipts.
Section 6A as the Charging Provision
provides what is taxable and provides
that it is ‘from income which is accrued
in or derived from Kenya for the use or
occupation of residential property’ and
that it does not state that is the gross rental
receipts.
Further section 15 (1) of the income tax
act on ascertainment of income subject to
tax for a year of income there shall, subject
to section 16, be deducted all expenditure
wholly and exclusively incurred in the
production of that income.
In addition, section 15(2) provides that
without prejudice to subsection 15(1), in
computing gains or profits chargeable to
tax under section 3(2)(a), the expense of
the type stated in that subsection shall be
deducted.
Since section 6A squarely falls under
section 3(2) (a) and specifically under
section 3(2) (a)(iii), section 15(2) is wholly
applicable in computing income subject to
tax under section 6A.
On the basis of section 6A read together
with section 15 the income subject to tax is
the gross rental receipts less all expenditure
wholly and exclusively incurred in the
production of that income and less
any applicable expenditure provided in
section15(2).
Section 34(1) (k) creates a vague and
confusing situation by computing tax
on gross receipts in an area that already
has a clear provision i.e. section 6A
which imposes tax on income, clearly
contradicting the hitherto clear provision.
On the basis of this vague and confusing
situation, residential rental income tax, in
my view, should be computed on the net
income not on the gross rental receipts.
In the alternative, section 34(1) (k) is
inoperable.
ernest@ernestandmartin.com
september - october 2017 19