TAXATION OF CO-OPERATIVE SOCIETY

A co-operative society is taken as a body corporate having its own existence separate from the
members. For tax purposes co-operative societies are classified into two broad categories
1. Those registered under companies Act CAP 486, e.g. KCC, KPCU, KFA e.t.c. Their
taxation is similar to any other company.
2. Those registered under the Co-op Societies Act CAP 490
They are also referred to as designated co-op societies which are further classified into 3
classes namely;
a) Apex and union designated secondary societies (members are other Sacco’s)
b) Primary designated primary societies (members are individuals)
c) Savings and credit co-op societies (SACCOS)
Co-operative Societies are subject to tax in accordance to Section 19 of ITA. It distinguishes
between taxation of designated primary societies and SACCOs
Taxation of designated primary societies
Their computation of adjusted business income is similar to any other business and the only
difference is in respect of dividends and bonus distributed. They are allowed to distribute all
their adjusted business incomes as dividends and bonuses thus leaving the commissioner with
nil income to tax. The dividends and bonuses must not exceed the adjusted profit for the year
therefore losses for the year of income are not carried forward.
For such dividends bonuses to be allowed;
i. They must be approved by the commissioner of co-op development
ii. Must have been actually paid in form of cash, cheque, & dividend warrant and credited
in member’s account.
iii. They must be approved in the AGM and by commissioner of domestic taxes.
iv. Where they haven’t been paid out, the auditor must certify that the amount will
subsequently be paid out.
Dividends paid out by these societies are known as non-qualifying dividends which suffer
15% WHT which is not final tax.

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 QUESTION ONE
Mawega dairy co-operative society prepared the following income statements for the year
2019.
Sale of milk and other products 21,600,000
Dividends from quoted companies 400,000
Less Expenses
Donation to a registered charitable organization 80,000
Income tax paid (2018) 800,000
Legal fees on bank overdraft 125,000
Bad debts written off 160,000
Loss on investment 60,000
Committee sitting allowance 300,000
Interest on overdraft 200,000
Stationary 100,000
Bonus &divided to members 20,000,000 (21,825,000)
Surplus 175,000
Required
i. Taxable income
ii. Tax payable
Solution
Approach one
Sale of milk and other products 21,600,000
Less allowable expenses
Donation to a registered charitable 80,000
organization
Legal fees on bank overdraft 125,000
Bad debts written off 160,000
Committee sitting allowance 300,000
Interest on overdraft 200,000
Stationary 100,000
Bonus &divided to members 20,000,000 (20,965,000)
Taxable business income/surplus 635,000

Approach Two
Surplus 175,000
Add back Disallowable expenses
Income tax paid (2018) 800,000
Loss on investment 60,000 860,000
1,035,000
Less Non business income
Dividends from quoted companies (400,000)
Taxable business income/surplus 635,000

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Taxation of SACCO’s
They are classified as primary societies because they are made up of individuals. These individual
are in most cases employed and as such their income has already been subjected to tax. Therefore
the income of Sacco’s from members is fully exempt from tax i.e. only incomes earned from 3rd
partners are taxable as follows;
a) Gross rental income
b) 50% of gross interest income and dividend income (non-qualifying)
c) Other investment incomes
NB: Transactions between the cooperatives and their members are considered mutual. Mutuallity
is recognized in general law that “a person cannot make a profit from himself” This means that
any profit and income arising from a cooperative’s transaction from members is tax exempt.

QUESTION TWO
Makazi Savings and Credit Cooperative Society (SACCO) Ltd. reported the following incomes
and expenditure for the year ended 31 December 2019:
Income: Sh. Sh.
Interest on loans to members 1,500,000
Interest on savings accounts 30,000
Interest on fixed deposit accounts 400,000
Other investment income 12,000
Rental income 600,000
Total income 2,242,000
Expenditure
Administration expenses 300,000
Repairs to rental property 240,000
Extension to rental propertu 1,050,000
Caretaker wages for rental property 120,000 1,710,000
Surplus 532,000
Required:
The taxable profit of Makazi Sacco Ltd. for the year ended 31 December 2019.

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Solution
Makazi Savings and Credit Cooperative Society (Sacco) Ltd.
The taxable profit for the year ended 31 December 2019.
Sh. Sh.
Interest on loans to members Exempt
Interest on savings accounts (50%x 30,000) 15,000
Interest on fixed deposit accounts (50%x400,000) 200,000
Other investment income 12,000
Rental income (net of allowable expenses) 600,000
Less Allowable expenses
Repairs to rental property (240,000)
Caretaker wages for rental property (120,000) 240,000
Total taxable income 467,000

Tax liability=30%x467, 000=sh. 140,100

QUESTION THREE
Jamboree SACCO reported the following for the year ended 31st December 2019
Income
Gross rental income 840,000
Interest on saving account 160,000
Interest on members loans 1,840,000
Interest on fixed deposit account 560,000
interest on treasury bills 435,000
3,835,000
less expenses
Repainting of rented property 156,000
Interest on loan for money invested in treasury bills 114,000
Administration expenses 496,000
Legal expenses relating to rented property 72,000
Bonus and dividends 356,000
Salaries and wages 2,345,000 (3,539,000)
Surplus 296,000
Required:
The taxable profit of Jamboree SACCO Ltd. for the year ended 31 December 2019.

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TAXATION OF MEMBERS CLUB
A member club means a club or institution where all assets of which owned by members are held
in trust for the members thereon.
Sec 21(1) requires that the income of members club including entrance fee and subscription fee be
taxed at corporation tax rate prevailing in year of income under consideration.
If at least 75% (and above) of the income of the members club is from members themselves then
it will be exempted from taxation but rental incomes, dividend incomes, interest income and
royalties still be taxed.
Illustration
Impala club was formed in the year 2002 for purposes of offering outdoor catering and sporting
services to its members. However the non-members are also allowed to enjoy the services at a
higher fee than the members. During the year ended 31st December 2019, it presented the following
accounts.
Revenue
Annual subscription from members 6,000,000
Registration fee from new members 2,500,000
Entrance fees from non-members 3,000,000
Rent income 2,000,000
Interst income (net) 816,000
Dividends from a quoted company 500,000
Expenditure 14,816,000
Municipal rates 500,000
Salaries and wages 3,500,000
Insurance on property 1,000,000
Depreciation 400,000
Loss on sale of shares 200,000
Fines and penalties to KRA 550,000
Taxes paid 800,000
Promotional costs 450,000 (7,400,000)
Net profit 7,416,000
Required
Taxable income and tax payable for the year ended 31st Dec 2019

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Solution
We first determine whether more 75% of the income is from members in which case the club will
be exempt from taxes
𝐼𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑚𝑒𝑚𝑏𝑒𝑟𝑠 = 6𝑚 + 2.5𝑚 = 8.5𝑚
𝐼𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑛𝑜𝑛𝑚𝑒𝑚𝑏𝑒𝑟𝑠 = 3𝑚
8.5
𝑃roportion of income from members to total income = 𝑥100 = 73.9%
8.5 + 3
Since the proportion is less than 75%, the members club is taxable in full.
Impala club
Taxable income for the year ended 31 st Dec 2019
Net profit 7,416,000
Add back disallowable expenses
Depreciation 400,000
Loss on sale of shares 200,000
Fines and penalties to KRA 550,000
Taxes paid 800,000 1,950,000
9,366,000

Less: Non business income, nontaxable

business income and capital allowances

Rent income 2,000,000

Interest income (net) 816,000
Dividends from a quoted company 500,000 3,316,000
6,050,000

Add other taxable non business incomes

Rent income 2,000,000
Interest income (Gross=100/85) 960,000 2,960,000
Total Taxable income 9,010,000

Tax liability =30%x9,010,000 2,703,000

Less WHT on interest 144,000
Net tax liability 2,559,000

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 TAXATION OF CHARITABLE TRUSTS /ORGANIZATION
The income of a charitable trust is generally exempted from taxation on the following grounds;
i. It must be public in character and be registered as a charitable trust
ii. Must be established and advancement of religion or education.
iii. Must be established for relief of distress or poverty.
iv. The total income of the trust must be expended or spent for charitable purposes and if it is
a partnership, the partners should not share profit.
v. If the charitable trust has business income it is exempt from tax provided that it relates to
two and three above.

TAXATION OF COLLECTIVE INVESTMENT SCHEMES (CIS)

CIS are pools of funds that are managed on behalf of investors by professional money managers.
They are arrangements made or offered by any company under which the contributions are pooled
and utilized with a view to receive profits. The manager uses the money to buy stocks, bonds and
other securities according to specific investment objective that have been established by the
scheme.
There are various types of CIS and they include
1. Unit trusts
2. Mutual funds
3. Employee share ownership saving plans (ESOP)
Taxation
CIS income is exempt from tax
TAXATION OF AMATEUR SPORTING ASSOCIATION
Their incomes other than income from investment are not taxable entrance fee ad subscription
fee. Conditions prevailing for them to be exempted from taxation are;
i. Their main objective should be foster outdoor sports and control any outdoor sports.
ii. Their members must consist of amateurs or affiliated associations whose members must be
amateurs only.
iii. Their M.O.A or by laws should have provisions defining an amateur or a professional and
providing that no person other than an amateur shall be a member.

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NB/The investment income is taxed normally at the corporation tax rate prevailing in a particular
year of income.
TAXATION OF TRADE ASSOCIATIONS
These are bodies which bring together people who engage in similar business with the objectives
of safeguarding /promoting business interests of the member. It is liable to tax on its total income
including the entrance fee and subscription from members provided it has made an election
meaning that they have given a notice indicating that they have agreed to treat entrance and
subscription as business income liable to tax.
Through an election they consider subscription income as business income taxable at the prevailing
coporation tax rate while allowable expenditure on member company.

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