CAF-2 Tax Practices Income form PropertyRent means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land ora building. “Rent chargeable to tax" refers to the portion of rental income that is subject to income tax under the Income Tax Ordinance in Pakistan. It includes the gross amount received or receivable by the owner of land or a building as consideration for the use, occupation, or the right to use or occupy the land or building. Essentially, itis the taxable rental income derived from a property. The amounts that are added to rent chargeable to tax includ 1. Regular rent payments received or receivable from the tenant for using the land or building. 2. Forfeited deposits paid under a contract for the sale of land or a building, which are treated as rent income. 3. Non-adjustable advance received in relation to buildings, which are treated as rent chargeable to tax over a specified period (typically 10 years) in equal proportions. 4, Ifthe rent received or receivable is less than the fair market rent for the property, the owner is treated as having derived the fair market rent for the period the property is let on rent, subject to certain conditions. Section 16: Non-adjustable amounts (refundable or non-refundable) received in relation to buildings 1. If the owner of land receives a non-adjustable amount from a tenant, itis considered as rent for tax purposes. This amount is charged to tax under “Income from Property" equally over the year it was received and the following nine tax years. 2. If the landlord refunds the non-adjustable amount to the tenant before the ten-year period ends due to the termination of the tenancy, the remaining portion of the amount will not be allocated to the tax year in which it is refunded or any subsequent tax years, except as specified in subsection (3). 3. Ifthe landlord rents the building or a part of it to another tenant (succeeding tenant) after refunding the earlier non-adjustable amount, and receives a new non-adjustable amount from the succeeding tenant, the new non-adjustable amount, minus the portion of the earlier amount that was already charged to tax, is considered as rent for tax purposes. This new amount is charged to tax under "Income from Property" as specified in subsection (1). The non-adjustable amount may be of two types, refundable or non-refundable. Tax treatment is the same for both types except provisions relating to refund and subsequent deduction from new tenants mentioned in points 2 & 3 will not apply. 1[Page geae p TAKID QAVI onvecan-rosires (geASRoot Questions - Describe the tax treatment of the following independent scenario Scenario 1: Mr. A owns a commercial property in Pakistan. He enters into a contract to sell the property to Mr. B for PKR 10,000,000. Mr. B pays a deposit of PKR 1,000,000. However, due to unforeseen circumstances, Mr. B is unable to complete the transaction, and the deposit is forfeited by Mr. A? Scenario 2: Ms. C rents an office building from Mr. D for PKR 500,000 per month. Later, she sub- leased the entire building to another party, Mr. E, for PKR 550,000 per month. How would the rental income be taxed for both Ms. Cand Mr. D? Scenario 3: Mr. F rents out his factory, including plant and machinery, to Mr. G for PKR 700,000 per month. Mr. G then subleases the entire factory, including plant and machinery, to another party, Mr. H, for PKR 750,000 per month. What are the tax implications for Mr. F, Mr. G, and Mr. He Scenario 4: Ms. H rents out her apartment to Mr. | for PKR 50,000 per month, which includes PKR 5,000 for utilities and other amenities. Total expenses incurred by Ms. H under this head for the year was Rs.40,000. Scenario 5: Mr. J rents out his office space to his cousin, Mr. k, for PKR 40,000 per month, while the fair market rent for similar properties is PKR 60,000 per month. In addition, Mr. K agrees to cover the maintenance costs of the office space. How is the rental income taxed in this situation? Answers: Scenario 1: The forfeited deposit of PKR 1,000,000 received by Mr. A would be considered as rent and be chargeable to tax under the head "Income from Property." Scenario 2: Ms. C would be liable to pay tax on the rent received from Mr. € (PKR 550,000) under the head "Income from Property.” The rent paid by Ms. C to Mr. D would not be considered income from the property as he is not the owner of the land and building. In this case, the difference of rent Rs 50,000 (550,000 ~ 500,000) will be charged under the head income from other sources Scenario 3: According to the Income Tax Ordinance 2001, the rent received by Mr. F for the lease of the factory building along with plant and machinery would be chargeable to tax under the head "Income from Other Sources." Similarly, the rent received by Mr. G from Mr. H for subleasing the factory would also be chargeable to tax under the head "Income from Other Sources" and Rs 50,000 will be considered as income. Scenario 4: According to the Income Tax Ordinance 2001, the rent received by Ms. H for the apartment would be taxed under the head "Income from Property" (PKR 45,000). The additional 2IPage geae p TAKID QAVI onvecan-rosires (geASamount of PKR 5,000 per month will be treated as Income from other sources and expenses of Rs 40,000 will be allowed against a total income of Rs. 60,000. Root Questions - Calculation of rent chargeable to tax. 1 The property was let out at a monthly rent of Rs. 150,000 from Ast July 2021 with a 10% annual rent increase. An advance of Rs. 1,500,000 was received as a non-adjustable advance. The property was vacated on 30th September 2024, Calculate the rent chargeable to tax for all relevant tax years ending on 30th June. The property was let out at a monthly rent of Rs. 200,000 from 1st October 2021 with a 15% annual rent increase, An advance of Rs. 1,200,000 was received as a non-adjustable advance. The Property was vacated on 30th September 2024, Calculate the rent chargeable to tax for all relevant tax years ending on 30th June. The property was leased at a monthly rent of Rs. 150,000 from July 1st, 2021, with a 10% annual rent escalation clause. Anon-adjustable advance of Rs. 1,500,000 was received. The property was vacated on September 30th, 2024, and the non-adjustable amount was refunded. A new tenant leased the property at a monthly rent of Rs. 200,000 and provided a non-adjustable advance of Rs. 2,000,000. Determine the rent chargeable to tax for the tax years 2022 through 2026. The property was leased at a monthly rent of Rs. 150,000 effective from July 1st, 2021, with a 10% annual rent escalation clause. A non-adjustable advance of Rs. 1,500,000 was received. The property was vacated on September 30th, 2024, and the non-adjustable amount was refunded, Later, on 1st November 2024, the landlord entered into a contract for the sale of the property with a buyer who paid an advance of Rs, 2,500,000. However, due to the buyer's default, the contract was canceled on 31st December 2024, and the advance was forfeited. The property was leased to a new tenant at a monthly rent of Rs, 200,000 effective from January Ast, and a non- adjustable advance of Rs. 2,000,000 was received. Determine the rental income chargeable to tax for the tax years 2022 through 2026. The property was leased at a monthly rent of Rs. 100,000 effective from July 1st, 2021, with a5% annual rent escalation clause. A non-adjustable advance of Rs. 500,000 was received. Fair Market value of rent was 150,000 with a 10% rent escalation and Rs 1000,000 non-adjustable advance. The property was vacated on September 30th, 2024, and the non-adjustable amount was refunded. The property was leased to a new tenant at a monthly rent of Rs. 250,000 effective from January 1st, and a non-adjustable advance of Rs. 2,000,000 was received. Determine the rent chargeable to tax for the tax years 2022 through 2026, Mr. A owns @ commercial property that is rented out to a company at a monthly rent of Rs. 100,000. The lease agreement specifies a 5% increase in rent every year. An advance of Rs. 500,000 was received by Mr. A at the start of the lease. The company vacated the property on September 30th, 2022 and the non-adjustable amount was returned to them. Mr. A found a new tenant and the property was leased out at 2 monthly rent of Rs. 120,000 starting from Ist Novernber 2022. The new tenant paid a non-adjustable advance of Rs. 800,000. However, the tenant defaulted on rent payments and vacated the property on 30th April 2023, Mr. A forfeited Rs. 240,000 from non-adjustable advance against unpaid rent and refunded the balance amount as per the terms of the lease agreement. Mr. A then leased the property to another tenant at a monthiy rent of Rs. 130,000 starting from 1st June 2023. The new tenant paid 3] Page eye onysosziraies Betea non-adjustable advance of Rs. 1,300,000. The property was again vacated on 30th September 2024, and the non-adjustable amount was returned to the tenant. Calculate the rent chargeable to tax for the tax years 2022 to 2025. 7. Mr. A leased out a property at a monthly rent of Rs. 250,000 from July st, 2021, with a 10% annual rent escalation clause. An advance of Rs. 1,500,000 was received. The property was vacated on May 31st, 2023, Mr. & found a new tenant who leased the property at a monthly rent of Rs. 200,000 from July 1st, 2023 and paid a non-adjustable advance of Rs. 2,000,000, out of Which Rs. 1,500,000 was paid to the previous tenant on Sth July 2023. Calculate the rental income chargeable to tax for the tax years 2022 through 2024. 8 Mr. A leased out a property at a monthly rent of Rs. 200,000 from November 1st, 2021, with a 110% annual rent escalation clause, An advance of Rs. 1,000,000 was received. The property was vacated on July 31st, 2023, but the advance received was returned on 30th June 2023 at the request of the tenant. Mr. A found a new tenant who leased the property at a monthly rent of Rs, 250,000 from September 1st, 2023 and paid a non-adjustable advance of Rs. 2,000,000. Calculate the rent chargeable to tax for the tax years 2022 through 2025. CALCULATIONS OF RENT CHARGEABLE TO TAX Answer 1. TY 2022 Rental Income (150000x12) 1,800,000 Non-Adjustable Advance | _(1,500,000/10) 150,000 Gross Rental 1,950,000 Income TY 2023 Rental Income (150,000x12x1.10) 1,980,000 Non-Adjustable Advance | _(1,500,000/10) 150,000 Gross Rental 2,130,000 Income Ty 2024 Rental Income (150,000x12x1.10") 2,178,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental 2,328,000 Income 4lPace nol 0 /TAHID QAVI onysosziraies BeteTY 2025, Rental Income (150,000x3x1.103) 598,950 Non-Adjustable Advance — Gross Rental Income 598,950 Answer 2. Ty2022 Rental Income (200,000x9) 1,800,000 Non-Adjustable Advance | (1,200,000/10) 120,000 Gross Rental Income 1,920,000 TY 2023 Rental Income (200,000x3) 600,000 Increased rent 15% (230,000x9) 2,070,000 Non-Adjustable Advance | (1,200,000/10) 120,000 Gross Rental Income 2,790,000 TY 2024 vitae yy) Rental Income (200,000x12x1.15) 3,174,000 Non-Adjustable Advance | (1,200,000/10) 120,000 Gross Rental Income 3,294,000 TY 2025 Rental Income (200,000x3x1.15*) 912,525 Non-Adjustable Advance — Gross Rental Income 912,525 ‘Oniy@os21.7031703 (RPEAnswer 3. TY 2022 Rental Income (150000x12) 1,800,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 1,950,000 TY 2023 Rental Income (150,000x12x1.10) 1,980,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 2,130,000 TY 2024 Rental Income _ | (250,000x12x1.107)__| 2,178,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 2,328,000 TY 2025 Rental Income (150,000x3x1.10°) 2,178,000 Rental Income (new (200,000x9) 1,800,000 tenant) Non-Adjustable Advance | (2,000,000-150,000- | 155,000 150,000-150,000)/10 Gross Rental 4,133,000 Income TY 2026 Rental Income (150,000x12x1.10°) 2,178,000 Non-Adjustable Advance | (1,550,000/10) 155,000 Gross Rental 2,328,000 Income Slrsce - ‘Oniy@os21.7031703 (RPEAnswer 4. TY 2022 Rental Income (150000x12) 1,800,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental 1,950,000 Income TY 2023 Rental Income (150,000x12x1.10) 1,980,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 2,130,000 TY 2024 Rental Income (150,000x12x1.107) 2,178,000 Non-Adjustable Advance | _(1,500,000/10) 150,000 Gross Rental Income 2,328000 TY 2025 Rental Income (150,000x3x1.10°) 598,950 Forfeited deposit 2,500,000 Rental Income (200,000x6) 1,200,000 Non-Adjustable Advance | (2,000,000-150,000- 155,000 150,000-150,000)/10 Gross Rental Income 4,453,950 TY 2026 Rental Income (200,000x12) 2,400,000 Non-Adjustable Advance | (1,550,000/10) 155,000 Gross Rental Income 2,555,000 ‘Oniy@0321-7031703 (a iAnswer 5. TY 2022 Rental Income (150000x12) 1,800,000 Non-Adjustable Advance | (500,000/10) 50,000 Gross Rental Income 1,850,000 TY 2023 Rental Income (150,000x12x1.10) 1,980,000 Non-Adjustable Advance | _(500,000/10) 50,000 Gross Rental Income 2,030,000 TY 2024 Rental Income (150,000x12x1.10) 2,178,000 Non-Adjustable Advance | (500,000/10) 50,000 Gross Rental Income 2,220,000 TY 2025 Rental Income (150,0003x1.10°) 598,950 Rental Income new (250,000x6) 1,500,000 tenant Non-Adjustable Advance | (2,000,000-50,000- 185,000 50,000-50,000)/10 Gross Rental Income 2,283,950 TY 2026 Rental Income (250,000x12) 3,000,000 Non-Adjustable Advance | (1,850,000/10) 185,000 Gross Rental Income 3,185,000 Blrsce - ‘Oniy@0321-7031703 (a iAnswer 6. TY 2022 Rental Income (100000x12) 1,200,000 Non-Adjustable Advance | (500,000/10) 50,000 Gross Rental Income 1,250,000 TY 2023 Rental Income (100,000x3x1.05) 315,000 Rental Income (new (120,000x6) 720,000 tenant) Non-Adjustable Advance = Gross Rental Income 1,035,000 TY 2024 Rental Income (130,000x12) 1,560,000 Non-Adjustable Advance | (1,300,000-50,000) 125,000 Gross Rental Income 1,685,000 TY 2025 Rental Income (130,000x3) 390,000 Non-Adjustable Advance [ Gross Rental Income 390,000 Answer 7 TY 2022 Rental Income (250,000x12) 3,000,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 3,150,000 S1Psce - ‘Oniy@os21.7031703 (RPETy 2023 Rental Income (250,000x11x1.10) 3,025,000 Non-Adjustable Advance | (1,500,000/10) 150,000 Gross Rental Income 3,175,000 Ty 2024 Rental Income (new (200,000x12) 2,400,000 tenant) Non-Adjustable Advance | (2,000,000-150,000- | 170,000 150,000)/10 Gross Rental Income 2,570,000 Answer 8 TY 2022 Rental Income (200,000x8) 1,600,000 Non-Adjustable Advance | (1,000,000/10) 100,000 Gross Rental Income 1,700,000 TY 2023 Rental Income (200,000x12x1.10) 2,640,000 Non-Adjustable Advance Gross Rental Income 2,640,000 TY 2024 Rental Income (250,000x10) 2,500,000 Non-Adjustable Advance | (2,000,000-100,000)/10 | 190,000 Gross Rental Income 2,690,000 TY 2025, Rental Income (250,000x12) 3,000,000 Non-Adjustable Advance | (1,900,000/10) 190,000 Gross Rental Income 3,190,000 Expenditures allowed against Income from the property. alr see ox % by: ZAKID AVL fee onysosziranies EEEfollowing expenditures or allowances are allowed as deductions according to Section 15A of the Income ‘Tax Ordinance 2001 against Income from the property. 1 10. Repairs to a building: An allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year, computed before any deduction allowed under this section. Insurance premium: Any premium paid or payable by the person in the year to insure the building against the risk of damage or destruction. Local rates, taxes, charges, or cess: Any local rate, tax, charge or cess in respect of the property or the rent from the property paid or payable by the person to any local authority or government in the year, not being any tax payable under this Ordinance. Ground rent: Any ground rent paid or payable by the person in the year in respect of the property. Profit on borrowed money: Any profit paid or payable by the person in the year on any money borrowed, including by way of mortgage, to acquire, construct, renovate, extend, or reconstruct the property. Investment in property sharing scheme: The share in rent and share towards appreciation in the value of property (excluding the return of capital, if any) from the property paid or payable by the person to the House Building Finance Corporation or a scheduled bank in the year under that scheme. Profit or interest on mortgage or capital charge: The amount of profit or interest paid on such mortgage or charge. ‘Administrative and collection charges: Any expenditure, not exceeding four percent of the rent chargeable to tax in respect of the property for the year computed before any deduction allowed tunder this section, paid or payable by the person in the year wholly and exclusively for the Purpose of deriving rent chargeable to tax under the head, "Income from Property" including administration and collection charges. These expenses may include costs such as advertising for tenants, property management fees, legal and professional fees related to the rental property, property inspection fees, or other similar expenses that are directly associated with the process of renting out the property and collecting rent. Legal services: Any expenditure paid or payable by the person in the tax year for legal services acquired to defend the person's title to the property or any suit connected with the property ina court. Unpaid rent allowance: An allowance equal to the unpaid rent where certain conditions are met, including bona fide tenancy, defaulting tenant vacating the property, reasonable steps taken to recover unpaid rent and unpaid rent was previously included in income under the head income from property. Only the expenses mentioned in this section are allowed as deductions for this purpose. Any other expenses not listed in this section would not be allowed as deductions when computing income under the head "Income from Property." [Pee By: ZAHID QAVI onsosztresines EeePractice Question - 1 Mr. Z owns a commercial building in Pakistan and receives a monthly rent of PKR 200,000 from his tenant, Mr. Y. The following expenses were incurred by Mr. Z during the tax year: u. Mm. iv. v. VI. vil. Vil. x. Repairs to the building: PKR 100,000 Insurance premium for the building: PKR 25,000 Local tax paid to the local authority: PKR 40,000 Ground rent: PKR 20,000 Interest on a loan taken to construct the building: PKR 150,000 ‘Administration and collection charges: PKR 25,000 Legal fees for defending the title to the property: PKR 30,000 Unpaid rent deemed irrecoverable (tenant vacated the property and tax was paid on this amount in the previous year): PKR 50,000. In the same tax year, Mr. Z recovered PKR 20,000 of the previously deemed irrecoverable rent. Calculate Income from the property of Mr. Z under the Income Tax Ordinance 2001 of Pakistan? Description (Section Reference) ‘Amount (PKR) Total annual rent income 2,400,000) Less: Allowable deductions = Repairs to the building 1/5 of RCT 480,000, = Insurance premium (15A(1)(6)) 25,000 ~ Local tax (15A(1)(c)) 40,000 = Ground rent (15A(1)(4)) 20,000 = Interest on loan (15A(1)(@)) 150,000 ~ Administration and collection charges (15A(A)(hy) Max 4% RCT 25,000 ~ Legal fees (15A(1)(i)) 30,000 = Unpaid rent deemed irrecoverable (15A(1)()) 50,000 Total allowable deductions 820,000 Net rental income (Total rent - Deductions) 1,580,000 ‘Add: Recovered rent (previously irrecoverable) (15A(2)) 20,000 Taxable rental income 1,600,000 Scenario 1) Mr. Aowns a commercial building and receives a non-adjustable amount of PKR 1,000,000 from a tenant, Mr. B, The tenancy lasts for the entire 10-year period. Scenario 2: Mr. owns a commercial building and receives a non-adjustable amount of PKR 1,000,000 from a tenant, Mr. B, The tenancy is terminated after 5 years, and Mr. A refunds the to Mr. B. Mr. A then rents the building to a new tenant, Mr. C, and receives a non-adjustable amount of PKR 800,000 from Mr. C. 12[Pege moony MOE ‘oniy@oszi-rosi7e3 | weeScenario 1: Description ‘Amount (PKR) Non-adjustable amount received 1,000,000 ‘Annual taxable income (1,000,000 / 10 years) 100,000 Mr. A will have an additional taxable income of PKR 100,000 per year for 10 years. Scenario 2: Description Amount (PKR) Non-adjustable amount received (Mr. 8) 1,000,000 ‘Annual taxable income for 5 years (1,000,000 / 10) 100,000 “Amount added in income during 5 years 500,000 Non-adjustable amount received (Mr. C) 800,000 Exceeding amount (800,000 - 500,000) 300,000 ‘Annual taxable income for next 10 years (300,000 / 10) 30,000 For the first S years, Mr. A will have an additional taxable income of PKR 100,000 per year. After refunding the to Mr. B and receiving PKR 800,000 from Mr. C, Mr. A will have an additional taxable income of PKR 30,000 per year for the next 10 years. Practice Question - 2 On 1 June 2021, Ali acquired a commercial property for Rs. 9,000,000 using a loan of Rs. 7,000,000 from ‘Apex Bank Limited. The remainder of the amount was financed through his savings. The loan has an Interest rate of 10% per annum and is repayable in ten equal biannual installments starting from 01 June 2022. (On 1 July 2021, Ali entered into an agreement to sell the property to Ahmed Enterprises for Rs. 12,000,000 and received a deposit of Rs. 600,000. On 15 July 2021, Ali forfeited the deposit when Ahmed Enterprises decided not to proceed with the purchase. On 1 August 2021, Ali rented out the property to his friend, Bilal, at a monthly rent of Rs. 200,000, Ali received a non-refundable deposit of Rs. 300,000 from Bilal and incurred expenses of Rs. 100,000 for renovations, Rs. 70,000 as insurance premium against the risk of damage or destruction by fire, and Rs. 160,000 for rent collection charges. Ali paid Rs. 30,000 to a valuation firm, which determined the annual rental value of the property at Rs. 2,400,000. Required: Under the provisions of the Income Tax Ordinance, 2001, and Rules made thereunder, compute the taxable income of Ali for the tax year 2022 under the relevant head of income. 13 [Page moony MOE ‘oniy@oszi-rosi7e3 | weeAnswer Taxable Income Computation for Ali (Tax Year 2022) Description ‘Amount (Rs.) Income from Property ‘Annual rent received 200,000 x 14 2,200,000 Non-refundable advance 300,000 x 1/10 30,000 Forfeited deposit 600,000 Total rent chargeable to tax (RCT) 2,830,000, Deductions a) Repairs and renovations (20% of RCT) 566,000 bb) Insurance premium 70,000 ¢) Rent collection charges (4% of RCT) or 160,000 whichever lower 113,200 Total deductions 749,200 “Taxable income from property 2,080,800) ‘Treatment of non-refundable and non-adjustable is same. Practice Question - 3 (On 1 July 2022, Ali acquired a plot of land for Rs. 11,000,000 using a loan of Rs. 8,000,000 from Apex Bank Limited. The remainder of the amount was financed through his savings. The loan has an interest rate of 111% per annum and is repayable in ten equal biannual installments starting from 1 July 2023. (On 1 August 2022, Ali entered into an agreement to sell the land to Ahmed Enterprises for Rs. 15,000,000 and received a deposit of Rs. 800,000. On 15 August 2022, Ali forfeited the deposit when Ahmed Enterprises decided not to proceed with the purchase. On 1 September 2022, Ali rented out the land to his friend, Bilal, at a monthly rent of Rs. 250,000. Ali received a non-adjustable deposit of Rs. 1,200,000 from Bilal and incurred expenses of Rs. 120,000 for leveling the ground, Rs. 90,000 as an insurance premium against the risk of damage or destruction by flood, and Rs. 200,000 for rent collection charges. Ali paid Rs. 35,000 to a valuation firm, which determined the annual rental value of the land at Rs. 3,000,000. Required: Under the provisions of the Income Tax Ordinance, 2001, and Rules made thereunder, compute the taxable income of Ali for the tax year ending 30 June 2023 under the relevant head of income. Solution Taxable Income Computation for Ali (Tax Year ending 30 June 2023) Description Amount (Rs.) Income from Property Annual rent received 250,000x 10 2,500,000 W[Poee oe : omysesnrsies (aeNon-adjustable advance — Not to be taken in case of land N/A Forfeited deposit 800,000 Total rent chargeable to tax 3,300,000 Less: Allowable deductions c} Rent collection charges (4%) 132,000 Total deductions 132,000 ‘Taxable income from property 3,168,000 Note: Deductions for insurance premium and repairs are not applicable for land, as they are relevant only for buildings. Ground leveling expense and valuation expense is not allowed as not mentioned in the list of deductible expenses. Practice Question - 4 Mr. X owns a commercial building and rents it to a tenant, Ms. Y, for an annual rent of PKR 2,000,000. The tenant pays a non-adjustable advance of PKR 1,000,000. The same property was also offered for sale and one interested party paid Rs 200,000 as token money but after a few weeks, he cancel the deal and the amount was forfeited During the tax year, Mr. x incurs the following expenses related to the property: 1. Repairs to the building: PKR 50,000 2. Insurance premium: PKR 20,000 3. Local tax: PKR 30,000 4. Ground rent: PKR 15,000 5. Interest on loan: PKR 100,000 6. Administration and collection charges: PKR 40,000 7. Legal fees: PKR 25,000 Compute Mr. X's taxable income for the tax year, considering the annual rent, for adjustable advance, and all allowable expenses. ited deposit, non- Solution: Description (Section Reference) ‘Amount (PKR) Annual rent income 2,000,000 ‘Add: Forfeited deposit 200,000 Nonadjustable advance 1/10 of 1,000,000 100,000 Rent chargeable to tax 2,300,000 Less: Allowable deductions = Repairs to the building 2,300,000 x 1/5 460,000 15| Page moony MOE oneosai-7asin GEE= Insurance premium (15A(1)(b)) 20,000, = Local tax (15A(1)(€)) 30,000 ~ Ground rent (15A(1)(d)) 15,000 = Interest on loan (15A(1)(e)) 100,000 Administration and collection charges (ISAM) 40,000 = Legal fees (154(1)() 25,000 Total allowable deductions 690,000 Net rental income (Total rent - Deductions) 41,610,000 Taxable rental income 1,610,000 Practice Question - 5 Following is a computation of Taxable Income from Property by Trainee working at Global Tax Consultants. ‘As Manager Tax you are required to review his work and identify incorrect treatment and recommend the correct treatment. Also, advise him which matter needs consideration before claiming deduction Rs ‘Rent received for 10 months. Two months’ rent is receivable 1,200,000 Deductions: Repairs to the building (20% of rent received) 240,000 Insurance premium 50,000 Local taxes and charges 80,000 Ground rent- whole amount of Rs 75,000 is payable > Profit on borrowed money ‘Administrative and collection charges (6% of rent received Unpaid rent allowance — No details available 50,000 Total Deductions: 672,000 ‘Taxable Income from Property (1 Total Deductions): 528,000 Kindly review the above computation and identify any discrepancies in the calculations. Please provide guidance to the trainee on how to correct the errors and ensure the correct application of the Income Tax Ordinance 2001 of Pakistan. Review of Trainee’s Taxable Income from Property Computation ‘The following are errors found in computation and some points need further clarification before claiming as deductions, 1. Income from property is chargeable to tax on an accrual basis so rent receivable for the last two ‘months amounting to Rs 240,000 should be added to income for the current year. 2. Repairs to the building: The trainee used 20% of the rent received (PKR 240,000) for the deduction. According to Section 15A(1)(a) of the Income Tax Ordinance, the correct deduction should be one-fifth (20%) of the rent chargeable to tax(1,440,000). The correct amount is Rs, 288,000. 16 Page moony MOE oneosai-7asin GEE3. Ground rent: The trainee did not include the ground rent as itis not paid during the year. As per Section 15A(1)(d), the ground rent paid or payable by the person in the year in respect of the property should be allowed as a deduction. Thus Rs 75,000 should be allowed as a deduction. 4, Administrative and collection charges: The trainee allowed a deduction of 6% of rent received (Rs 72,000) for administration and collection charges. Section 15A(1)(h) limits this deduction to not exceed 4% of the rent chargeable to tax (1,440,000) in respect of the property for the year computed before any deduction allowed under this section. The correct amount is Rs. 57,600 (4% of Rs. 1,440,000). 5. Legal services: The trainee included a deduction for legal services (PKR 20,000). Ensure that this amount was actually paid or payable by the person in the tax year for legal services acquired to defend the person's title to the property or any suit connected with the property in a court, as per Section 15A(1}(i). 6. Unpaid rent allowance: The trainee included a deduction for unpaid rent allowance (PKR 50,000). Verify that this deduction meets the conditions stated in Section 15A(1)()), including bona fide tenancy, defaulting tenant vacating the property, and reasonable steps taken to recover unpaid rent. Income of joint owners [Sec 66] Where any property is owned by two or more persons and their respective shares are definite and ascertainable: {a) the persons shall not be assessed as an AOP in respect of the property; and (b) The share of each person in the income from the property for a tax year shall be taxable in their own hands respectively and not as AOP. Where any property chargeable under section 15 is owned by two or more persons and their respective shares in that property are not definite and ascertainable, the property will be considered as being jointly owned by an association of persons (AOP) and taxable income and tax payable thereon will be computed as per the principles of taxation for AOP. This section shall not apply in computing income chargeable under the head “Income from Business”. Practice Question - 6 (On 1 July 2022, Sarah and Adil jointly acquired a commercial building for Rs. 30,000,000. They contributed to the purchase price as follows: Sarah contributed 60%, while Adil contributed the remaining 40%. They rented out the building to a local company at an annual rent of Rs. 6,000,000, starting from 1 August 2022. They also received a non-refundable deposit of Rs. 1,200,000 from the tenant. During the tax year ending 30 June 2023, they incurred the following expenses: Rent collection charges: Rs. 400,000 Repairs and maintenance: Rs. 500,000 Insurance premium: Rs. 150,000 Property tax: Rs. 100,000 a7 [Page sue pTAMIDGAY Fig onysosziranies EEECompute the taxable income for Sarah and Adil for the tax year ending 30 June 2023 under the following assumptions: Their respective shares in the property are definite and ascertainable. Their respective shares in the property are not definite and ascertainable, and the property is considered jointly owned by an Association of Persons (AOP).. Answer: ‘Assumption 1: Shares are definite and ascertainable Description Total (Rs.) ‘Annual rent received 6,000,000 /12_ x11 [5,500,000 Non-refundable deposit 1/10 120,000 Gross Rental income 5,620,000 Less: Allowable deductions Rent collection charges 4% of RCT 224,800 Repairs and maintenance 1/5 of RCT 1,124,000 Insurance premium 150,000 Property tax 100,000 Taxable Income a te (Rent + Deposit - Expenses) 4,021,200 Total Income Sarah share 60% ‘Adil share 40% 4,021,200 2,412,720 1,608,480 Assumption 2: Shares are not definite and ascertainable (AOP) Description “Amount (Rs.) ‘Annual rent received 5,500,000 Non-refundable deposit 120,000 Gross Rental Income 5,620,000 Less: Allowable deductions Rent collection charges 224,800 Repairs and maintenance 1,124,000 Insurance premium 150,000 Property tax 100,000 Taxable Income (AP) (Rent + Deposit - Expenses) 4,021,200 In this case, the taxable income would be computed for the Association of Persons (AOP) as a whole, and then the tax payable would be allocated to Sarah and Adil according to the tax rules for AOPs. 18|Poge moony MOE oneosai-7asin GEE