Taxable-Persons,-Income,-Rates-Of-Tax-And-Reliefs---------------------------------- -------25

Example:

A-contract-for-an-unspecified-term-and-which-provides-for-no-terminal-payments-is-terminated-on-
31.12.2005.--A-compensation-Kshs.-1,300,000-is-paid.--The-employee-was-earning-Ksh.-400,000-at-
the-time-to-termination.

TAXATION-I
26 -------------------------------------------------------Lesson-Two

The-compensation-will-be-spread-as-follows:

Year Taxable-Amount
(Kshs.)
2006 --400,000
2007 --400,000
2008 --500,000
-------------1,300,000

Note:
The-above-treatment-of-compensation-for-the-termination-of-contracts-apply-to-all-employees-and-
whole-time-service-directors.

LIMITING-OF-BENEFITS

Where-a-benefit-is-enjoyed-for-a-period-of-less-than-a-year,-the-taxable-value-of-the-benefit-is-proportionately-
reduced-to-the-period-enjoyed.-For-example,-if-an-employee-was-provided-with-furniture-for-three-months-in-
2005,-he-would-be-taxed-on-one-quarter-of-the-benefit-as-follows:-Assuming-the-price-of-the-furniture-was-
sh-800,000

-Taxable-benefit=12%-x-800,000-x3/12-=-24,000

Benefits-excluded-from-Employment-Income-(Tax-free-employment-benefits):

1. Expenditure-on-passage-for-expatriates-only.
This-is-expenditure-on-traveling-between-Kenya-and-any-other-place-outside-Kenya-borne-by-the-
employer-for-the-expatriate-employee-and-family.

Conditions-for-qualifying-for-passage:

(i) The-employee-must-not-be-a-citizen-of-Kenya.
(ii) The-employee-must-be-recruited-or-engaged-from-outside-Kenya.-However,-an-expatriate-
employee-does-not-lose-the-free-passage-by-changing-jobs-in-Kenya.
(iii) The-employee-must-be-in-Kenya-solely-for-the-purpose-of-serving-the-employer.-The-expatriate-
may-fail-to-qualify-for-passage-if-he-engages-in-commercial-activities-in-addition-to-employment.
(iv) The-employer-obtains-tickets-or-reimburses-the-expatriate-for-employee-the-passage-cost.

Where-cash-is-paid-for-passage-and-the-employee-may-not-travel-and-could-in-fact-use-the-money-for-
personal-expenses,-then-the-cash-sum-is-taxable-on-the-employee.

2. Medical-Expenses:
Where-an-employer-has-a-written-plan-or-scheme,-or-by-practice-provides-free-medical-services-to-all-the-
employees-(non-discriminative),-the-value-of-such-medical-expenses-is-a-non-taxable-benefit-for-
employees-and-whole-time-service-directors.-Where-there-is-no-medical-scheme-or-plan-for-all-
employees,-the-payment-of-any-medical-bills-is-a-taxable-cash-payment-to-the-beneficiary.--It-is-
permissible-to-have-different-schemes-for-different-categories-of-employees.

3. Fringe-benefit
4. Benefits-in-kind-whose-value-does-not-exceed-Kshs.-36,000-p.a.-(3000-p.m).

STRATHMORE-UNIVERSITY-●-STUDY-PACK
Taxable-Persons,-Income,-Rates-Of-Tax-And-Reliefs---------------------------------- -------27

Note:
A-director-other-than-whole-time-service-director-is-excluded-from-any-tax-free-medical-scheme.--
However,-w.e.f-1/1/2006,-medical-benefits-received-by-such-directors-is-tax-free-as-long-as-it-does-not-
exceed-Kshs.-1,000,000-p.a.

5. The-amount-of-contribution-by-an-employer,-on-behalf-of-an-employee,-to-a-pension-fund-or-scheme-
whether-the-fund-is-registered-with-the-Commissioner-of-Income-Tax-or-not.
6. With-effect-from-12.6.87,-the-amount-contributed-by-an-employer,-on-behalf-of-an-employee,-to-a-
provident-fund-which-is-registered-with-the-Commissioner-of-Income-Tax.
7. Educational-fees-paid-by-the-employer-for-the-employee-as-long-as-such-fees-is-taxed-on-the-employer-
(disallowable-expense).

Expenses-those-are-deductible-against-employment-income:

a) Mortgage-interest-(owner-occupier-interest)-paid-on-loan-to-buy-or-improve-a-residential-house-to-
the-maximum-of-Shs.100,000.--Where-the-mortgage-interest-paid-is-less-than-the-maximum,-the-
actual-interest-paid-is-claimed.-Where-the-mortgage-interest-paid-is-more-than-the-maximum,-only-
the-maximum-can-be-claimed.-The-mortgage-interest-is-also-deductible-against-other-incomes-and-
will-appear-later-on-in-the-list-of-specific-expenses-deductible-against-taxable-income.--The-maximum-
amount-has-been-increased-to-Kshs.-150,000-p.a.-w.e.f-1/1/2006.

b) Amounts-contributed-by-employee-to-a-registered-pension-or-provident-and-individual-retirement-
schemes-to-the-following-limit:
1998 ---1999 2000 2001 2006
--------------------- --Shs -----Shs --Shs -Shs
Pension:-the-lower-of
- actual-contribution-and-
- 30%-of-pensionable-income
or-–-Set-limit-p.m. 10,000 12,500 15,000 17,500 20,000

(c)Annual-subscriptions-to-professional-associations-such-as-LSK,-ICPAK,-KMA-etc

(d) Contribution-to-a-Registered-Home-Ownership-Savings-Plan-Hospital-up-to-Sh.48,000-p.a.-(Sh.-
4,000--
-------p.m)

(e) Amount-of-NSSF-contributions-to-a-maximum-of-Kshs.-2,400-p.a.-(200p.m)

Employment--Income-which-is-exempted-from-Taxation.

The-following-employment-incomes-are-not-taxed-as-they-are-exempted-from-taxation:

i) Employment-income-of-foreign-embassy-staff-excluding-locally-recruited-staff.
ii) Employment-income-of-Organization-of-African-Unity(OAU)-staff,-foreign-and-locally-recruited.
iii) Employment-income-of-United-Nations-Organization(UNO)-staff,-foreign-and-locally-recruited.
iv) Allowances-payable-to-the-Speaker,-Deputy-Speaker,-Vice-President,-Ministers,-Assistant-Ministers,-and-
Members-of-Parliament.-The-salaries-are-however-taxed.
v) Salaries,-allowances,-and-benefits-paid-from-public-funds-to-the-President-of-Kenya.
vi) Foreign-allowances-paid-from-public-funds-to-Kenya-officers-serving-abroad.

Gains-or-profits-from-any-right-granted-to-any-other-person-for-use-or-occupation-of-property.

This-is-consideration-received-for-the-use-or-occupation-of-property-and-includes:

 Royalty-for-copyrights,-patents,-trademarks-etc.

TAXATION-I