The-Accountant-Sep-Oct-2017-Final

Financial Reporting and Assurance
IS THE LAW ON TAXATION
OF RESIDENTIAL RENTAL
INCOME VAGUE?
By Ernest Muriu
Is residential rental income tax
payable on net income or gross
rental receipts. 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 thatimposes
Income Taxon 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 1stJanuary 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 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
Provisionprovides 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.
The act defines “total income”
to mean, in relation to a person, the
aggregate amount of his income, other
than income exempt from tax under Part
III, chargeable to tax under Part II, as
ascertained under Part IV;
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.
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 27