With rental income growth, real estate owners need to comply

By the close of the 2018/2019 financial year, KRA collected Sh 8.584 billion on rental income.

In Summary

• The rapid increase in urban population is largely a key factor that has led to an exponential growth in the real estate sector with a bias to residential rental properties

• There is, therefore, a need for more landlords to voluntarily come on board and enrol for monthly rental income.

Rental houses in Nairobi
Rental houses in Nairobi
Image: FILE

Rural-urban migration is now more pronounced in many parts of the developing world-Kenya included. This trend, researchers say, is predominantly driven by the pursuit of better living standards. As a result, urban population in many cities has risen steadily. A carbon copy of this phenomenon is very much alive in Kenya.  

The rapid increase in urban population is largely a key factor that has led to an exponential growth in the real estate sector with a bias to residential rental properties. This occurrence is supported by the many upcoming residential properties in the outskirts of our major urban centres.

Without a doubt, investment in the real estate sector, just like most sectors of the economy, generates substantial taxable income. Despite the vibrant growth witnessed in the real estate sector, especially in the residential properties sub-sector, the tax generated has not been satisfactorily reflecting in the national revenue coffers.

This has been the case in spite of the government putting in place tax legislation frameworks to simplify revenue collection from this sector.

For a long time, commercial and residential properties owners were required to make full disclosure of the rental income received as a separate source of income under the annual income tax return. They were also required to file timely returns and make accurate payments of the rental income tax due.

The government through Kenya Revenue Authority (KRA) in a bid to simplify the rental income taxation specifically for residential property owners introduced a tax known as Monthly Rental Income (MRI) through the Finance Act 2015.

MRI came to effect from January 2016. All residential property owners receiving rent ranging from Sh12,000 per month (144,000 per year) and Sh10Million and below per year are required to register for Monthly Rental Income (MRI).

MRI is paid at 10 per cent of the gross rent income received on monthly basis. No expenses are allowed under MRI. The rental income tax is due on or before the 20th day of the month following the month in which the rent was received.

Just like any other tax obligation, the legislation that administers MRI tax, Income Tax Act Cap 470 Section 6A, imposes a penalty of Sh2,000 or a five per cent of the principal tax due on defaulters. The higher of either supersedes.

Besides being accounted for monthly, MRI tax regime is simpler than the former regime where tax payable was calculated on a graduated scale for individuals. Onus was also on landlords to maintain a detailed records system to account for the income received.

However, with the simplified regime, landlords are required to maintain minimal book keeping (Rent Schedules) thereby doing away with complexities associated with the former regime. Minimal book-keeping also means less operational costs for the landlords.

MRI tax is also a final tax, which means that a landlord shall not be required to account again for the rent income received at the end of the financial year. This is for residential property owners who do not have any other source of income like Employment Income and Business Income, among others.

Since the inception of MRI tax in 2016, KRA has put in place an elaborate sensitisation programme geared towards educating and facilitating the landlords to comply with the simplified tax regime.

Sensitisations are held periodically to cater for newly recruited landlords with a view to enlighten them on the tax obligations they are liable to. KRA has also been leveraging on data-driven compliance as an alternative mechanism to recruit more landlords.

These initiatives coupled with an array of others have so far been yielding positive results in terms of more recruitments and improved revenue performance from rental income.

By the close of the 2018/2019 financial year, KRA collected Sh8.584 billion on rental income. This was marked by a 42 per cent revenue growth. The collection further translated to a 113 per cent revenue performance against the set target for the past financial year.    

Just like with other tax obligations, taxpayers under MRI are required to assess themselves and remit the required percentage of their income as tax within the required time.

The self-assessment regime is purely based on trust between the taxman and a taxpayer and stems from KRA’s mission of building taxpayers’ trust through facilitation.

Within the six months of the 2015/2016 when MRI was effected, KRA recruited about 30,000 landlords. Subsequent recruitments have continued to bring on board more landlords. In the just closed 2018/2019 financial year, for example, KRA recruited 36,818 new landlords in the continuous recruitment drive.

KRA is currently undertaking an enforcement drive to ensure all non – compliant landlords are recruited and issued with estimated assessments after which stun tax recovery measure will be applied. Recruitment of more landlords is one of the tax-base expansion initiatives that KRA is banking on to enhance revenue collection across the board.

There is, therefore, a need for more landlords to voluntarily come on board and enrol for monthly rental income. By so doing, the revenue collected will go a long way in enabling the government to meet its objectives of making lives better for all Kenyans. When enough revenue is collected, the country will not need to borrow to sustain herself.

The writer is the Chief Manager in charge of Tax Base Expansion at the Kenya Revenue Authority (KRA).