Income Tax and Capital Gains Tax

A property vendor is required to properly determine the tax that are applicable on the gain made. It is important to ensure that proper taxes are paid within the required timelines and hence no instances of incurring penalties and interest which would in effect reduce his profit.

The Eighth Schedule to the ITA that provides for Capital Gains Tax (CGT) is chargeable on Land which includes buildings on land and anything attached to land or permanently fastened to anything attached to land. This With effect from 1st January 2015, the

However, there CGT is not applicable in instances where Income that is taxed elsewhere. Section 3 of the Income Tax Act (ITA) provides that income tax is chargeable on gains or profits from any business, for whatever period of time carried on.

The applicability of CGT or corporation tax is dependent on the core business carried out by the seller.

In the month of April 2021, the Tax Appeals Tribunal determined a matter between the Ruaraka Diversified Investments Limited (Appellant) vs. Commissioner of Domestic Taxes (Respondent), Tax Appeal No. 86 of 2019 and ruled that corporation tax was applicable on the sale of land by a real estate company.

The Appellant was registered in Kenya in April 2012 as a branch of a Mauritius company to invest in and hold real estate.

In the year 2011, the Appellant bought land measuring 13.01 hectares (equivalent to 34.14 acres) at 1.2 Billion. The Appellant subdivided the land and sold 29.5 acres, between the years 2013 to 2015, to three entities at KES 2.7 Billion.

The Appellant had sought for a private ruling from the KRA who confirmed that the sale was subject to CGT and proceeded to make payment of KES 43.9 Million as CGT.

However, in 2018 the KRA revoked its private ruling citing substantive misrepresentations by the Appellant and assessed corporation tax of KES 672.2 Million on the sale of the land. The Appellant lodged an appeal at the TAT against the KRA’s decision in 2019.

In its judgement, the TAT found that the investment company had made substantive misrepresentations to KRA given that the sale of land was not a one-off transaction and that the nature of business of the company was that of developing and selling land.

The Tribunal held that the action of holding property for a period for the value to appreciate and thereafter selling with the aim of making profit constituted trade. Subsequently, the sale was done in the normal course of business operations of the real estate company and that the transaction was for the purpose of making profit, as such the proceeds of the sale of land was subject to Corporation Tax and not CGT.

In the event that the gain on sale of land is subject to income tax, then it is taxed at 30% if the seller is a company or at the graduated rates if the seller is an individual.

However, if the gain is taxable at CGT, then the applicable rate is 5% of the gain which is a final tax. The gain is determined as the consideration less the adjusted cost of the property. The adjusted cost is determined as the initial cost of purchase and includes any other incidental costs such as the costs incurred in improving the building, cost of advertising, cost of professional services of any surveyor, valuer, agent or legal adviser.

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