The Residential Rental Income Tax was by the Finance Act 2015 which introduced Section 6A in the Income Tax Act Cap 470 Laws of Kenya, which provides for a simplified tax regime on rental income. The tax is payable by any resident person (individual or company) from income which accrues in or is derived from Kenya for the use or occupation of residential property. According to the Act, a 10% tax rate on gross rental income is payable for rental income upto a maximum of Kshs. 10 million per annum.
The Finance Act, 2016 has now specified the minimum rental income chargeable to tax under the residential rental income tax regime.
From 9th June 2016, any person (company and individual) earning a gross rent of more than Kshs. 144,000 per annum (Kshs. 12,000 per month) and not exceeding Kshs. 10 million per annum (Kshs. 833,333 per month) is required to file the monthly Residential Rental Income Tax returns.
However, landlords with rental income below Kshs. 12,000 per month shall be required to file annual income tax return and declare this rental income together with income from other sources.
Where the rental income exceeds Kshs. 10 million during a year of income or a person has reason to believe that the rental income is likely to exceed Kshs. 10 million, the person shall inform the Commissioner of that fact before end of that year of income. Failure to notify is an offence under the Income Tax Act.
For exclusion, person who opts not to be subject to the residential rental income tax in favour of the old rental income tax regime (annual) shall notify the Commissioner in writing, at least three (3) months before the end of the year of income. The option not to be subject to residential rental income shall take effect in the subsequent year of income.
Under the Act, rental income earned by a Partnership is taxed on the partners according to their profit sharing ratio as per the Income Tax Act.
The tax point for the residential rental income tax is when landlords receive rent from their tenants, either monthly, quarterly, semi-annually or annually. However, returns must be filed monthly.
The new tax of 10% on gross rent became effective on 1st January 2016. Eligible persons shall be required to file and make correct declaration through a simplified tax return via iTax System and pay tax due on or before the 20th day of month immediately following the month which the rent was received.
The residential rental tax will be a final tax and will be paid on monthly basis using a simplified online payment return. Therefore, eligible landlords shall not be required to file annual returns unless one has other incomes e.g. commercial rent, employment income, business income, farm income, etc. The returns must be filed online via iTax.kra.go.ke
This tax regime will have exemptions for rental income from commercial property, persons whose income is exempt from tax under the 1st schedule of Income Tax Act, non- resident landlords (as per Income Tax Act definition), landlords earning residential rental income of less than Kshs. 144,000 p.a., landlords earning residential rental income of more than Kshs. 10 million per year and persons who by writing to the Commissioner elects not to be subjected to the Residential Rental Income Tax.
Failure to file the residential rental income tax return by the due date of 20th day of the month immediately following the month which the rent was received shall attract a penalty of Kshs. 20,000 or 5% of principal amount due, whichever is higher. In addition, any tax not paid by the due date shall attract a penalty at 20% of the tax payable and interest of 1% per month.
Benefits of the Residential Rental Income Tax include simplified tax computation at 10% flat rate on gross rent instead of the 10% -30% rates in the old rental income tax regime and landlords shall not be required to produce records to account for expenses. Also, the tax is a final tax thus landlords will not be required to file annual returns if they do not have other incomes, and compliance is easy and cost effective.