Thomas Sumba says that he took a co-operative 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 per cent 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 per cent 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 per cent tax simplifies the filing process since no complicated calculations of profit are required — you just work out 10 per cent of the rent. However, for a landlord like Thomas who developed the houses through a loan, there is a chance that he may not be 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 per cent 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 co-operative. These institutions usually lend money for three years at 12 per cent 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 no other costs, it means that the profit is Sh50,000.
Normal income tax for this profit is 30 per cent; 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 per cent 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 this kind of financing, the landlord is making a profit yet his rent (Sh100,000) is not enough to pay the loan instalments (Sh166,000)! He has to top up Sh66,000 from other sources.
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Publish date : 2018-12-30 09:20:28