TAXATION OF INCOME

BAC

201:

By

Charles

Kimathi

INCOME TAX ACT (ITA) CAP 470

1. THE YEAR OF INCOME

This refers to a period of 12 months with reference to

which incomes of individuals & business units are
assessed for tax purposes.
In case of companies, all income earned in a specific
period of 12 months.
In case of individuals all incomes earned for a specific
period of 12 months except for employment income
whose year of income must run from 1st January to 31st
Dec.
In case of partnerships all incomes during a specific
period of 12 months except for employment income.

Employment income include;

basic salary
bonus
commission,
benefits in kind
car & housing benefits
medical & insurance benefits
allowances etc (from employer).

2. THE GRADUATED SCALE

Income Ksh. P.a

1st 121 968
2nd Next 114,912
3rd Next 114, 912
4th Next 114,912
Excess of 466,704

Rate
10%
15%
20%
25%
30%

Income sh. p.m

1st 10,164
Next 9,576
Next 9,576
Next 9,576
Excess of 38,892

Summary

Income (Ksh P.a)

1st 121,968
Next 114,912
Excess 466 704

rate
10%
60% ie (15% +20% +25%)
30%
100%

Illustration

John earned the following incomes in 2015.

Employment income
= 300,000
Business income = 150,000
Rental income
= 150,000

Required
Compute Johns Gross taxable income

Solution

Employment income=
B/S income
=
Rental income
Taxable income

300,000
150,000
150,000
600,000

Tax liability
1st 121 968 x 10%
= 12, 196
Next 114 912 x 60%
= 68, 947
Excess (600 000-466 704)*30%
=
39 988
Gross payable tax
121 131

Summary
1st 466 704
Excess (600 000-466 704)*30%
Gross payable tax

= 81 142
= 39 988
121 131

Example 2
Alice earned a total income of Ksh 380 000 in 2015.
Determine her gross tax liability

Solution

1st 121 968 * 10%

114 912* 35%
Balance 28,208 x 25%

=
=
=

12 196
14 298
7,052
59,467

PERSONS LIABLE TO TAX

All those assessable to tax are called persons where the term
embraces a natural person being and artificial person (body
corporate).

Note
i) All persons resident in Kenya whether or not they are citizens
are liable to pay tax in Kenya.
ii) All persons not resident in Kenya but derive income from any
property, trade employment, profession etc in Kenya are
liable to pay tax only on that income earned in Kenya.
iii) Income earned by a resident person from abroad (foreign
income) whether or not is remitted in Kenya is not taxable in
Kenya.

Exceptions

Resident individuals are taxed on worldwide employment

income
If a business is incorporated in Kenya and has branches in
foreign countries, the profits made by such branches are
taxable in Kenya

Example 1

John is a Kenyan resident employed by EABL & earned the

following income in 2015.

Salary
Ksh. 900,000
Fees Nigeria
sh. 50,000 (employment income)
Business income (Kitengela)
Ksh. 200,000.
Rental Income (Bamako, Mali)
Ksh 120 000
Profit on sale of shares (Kenya)
Ksh 80 000
Proceeds from sale of land (Ruiru) Ksh 150 000

Required

Determine his taxable income and tax liability

(personal relief Ksh 13 944 p.a )

Solution

Salary (Kenya)
90 000
Fees (Nigeria)
50 000
Business income (Kitengela)
200,000
Rental Income (Bamako, Mali) Ignore
Taxable income
1,150,000

1st 466,704
(1150, 000 466, 704) *30%
Less: tax relief
Tax payable

81,142
204,988
(13,944)
272,186

Note

Gain or sale of shares and proceeds from sale of land are

capital gains & therefore liable to capital gains tax only.
Only employment income from abroad is taxable in Kenya for
a resident hence we ignore the rental income.

Example 2

Diana left Kenya in 2007 to settle in California as a doctor. In

2015 She earned the following;
Basic Salary (US) Sh. 800,000
Rental income (Kiambu) sh. 350,000
Business income (Nakuru) Sh. 250,000
Sale of property (Texas) sh. 600,000
Business income (California) sh. 400,000

Required;
Determine, her,
Residential status
Taxable income & tax payable if any.

Solution

a. Diana is not resident in Kenya Since she has settled and she
is staying and employed in the U.S as a doctor.

Taxable income
Rental income (Kiambu)
Business income (Nakuru)
Taxable income

350,000
250,000
600,000

Tax payable
1st 466 704
81, 142
(600,000 466 704) *30%
39,988
Gross Taxable payable
121,130

NB// Non residents are not given personal relief, only residents
get personal relief.
We tax only incomes earned in Kenya for non residents.

RESIDENTS

This is a matter of physical presence where an individual is

considered to live temporarily or permanently in a country.

Residents in respect if
individuals
An individual is considered a Kenyan resident if :
He has a permanent home in Kenya and was present in
Kenya for at least a day in the year of income.
He has no permanent home in Kenya but was present in
Kenya for
A total of 183 days or more in the year of income (6 months).
An average of 122 days or more in the year of income plus
two preceding years.

2015
2014 =
2013

=
x
=

100
100 + x + y= or greater than
y
3

122 days

Example

Consider the following individuals with no permanent home in

Kenya..

Year
John
Betty
Carol
David
2015
230
90
____
50
2014
80
300
300
80
2013
100
210
200
60
Determine their residence status

Solution

John
He is a residence as he was present for more than 183 days in
the year of income.

Betty She is a resident as she was present for more than an

average of 122 days in the 3 years.

i.e 90 + 300 + 210 = 200

3


Carol She is not a resident as she was totally absent in the
year of income.

David He is not a resident as he was present for less than

183 days in the year of income i.e 2015 neither was she
present for more than an average of 122 days in the 3 years.

PERMANENT HOME
The term permanent home has not been defined by the I.T.A
i.e. Income Tax Act has not defined legal or meaning & that
must be interpreted or construed in its ordinary sense or
natural meaning.
The court interpreted the word home to mean the following;
i. A home does not necessarily mean a house, flat, apartment,
bungalow etc.
It shall include a hotel room where one has resided for a
considerable time.

ii. The home can either be owned or rented.

iii. The home must be available to the individual for at least a
part of the year.
iv. The individual must have full control over the home.
v. In the home one should expect family or personal belongings
of the individual.
vi. The home to a substantial must have been occupied by the
family or individual himself.

Significance of residence to
individuals
i.

A resident person qualifies for personal relief while a non

resident does not i.e. personal relief Kshs. 13,944 p.a (sh.
1162 p.m).

ii. Residents are taxed on all employment incomes wherever

earned while non residents are taxed on employment
income earned in Kenya only.
iii. Residents operating business partly in Kenya & partly
outside are taxed on total profits from all branches.
iv. Incomes such as rent royalties & pension are taxed at
graduated scale rates for residence while at WHT
(withholding tax) for nonresidents.

(ii) Residents in respect of body

corporate
A company is considered a Kenyan resident if;
1. It is incorporated or registered in Kenya under Kenyan Laws.
2. The management & control is exercised in Kenya in the year of
income under consideration.
3. The company has been gazetted by minister for finance as a
resident company.

 Significance of Residence to body Corporate

1. Resident companies are taxed at 30% while non residents at
37.5% corporation Tax.
2. Resident Companies are allowed on certain expenses as per
Section 15 of I.T.A which are not available for non residents.