Rental Income Tax
Following the Minister of Finance pronouncements in his 2021 budget speech, effective 1 January 2022, rental income now falls under the turnover tax regime with the obligation to pay the tax now borne by the landlord and not the tenant unless the tenant has been appointed by the Commissioner-General as a withholding agent. The effect of this tax regime is that it abolishes the payment of withholding tax by tenants for premises that they rent. This article addresses the legal implications the new regime will have on lease agreements that currently provide for the remittance of withholding tax by the tenant, and the possible solutions that parties to these lease agreements may employ.
Taxation of rental income
The Income Tax Act, Chapter 323 of the Laws of Zambia (the “ITA”) defines “rent” as a payment in any form, including a fine, premium or any like amount, made as a consideration for the use or occupation of or the right to use or occupy any real property directly connected with the use or occupation of, or the right to use or occupy such real property. The property subject to rental income tax is broad and includes the following: residential premises, commercial premises, bare land rented for farming, car parks and water bodies (where a person owns a waterfront and lease out such for commercial purposes). It also extends to boats that operate on water for commercial purposes, and boarding houses. In the same respect, some properties are excluded from this including lodges licenced to operate as such, machines leased out, and use of goodwill.
Prior to the 1 January 2022 amendment to the ITA, rental income was taxed under the withholding tax collection mechanism at the rate of 10% of the gross rental income. The obligation to collect and account for the tax was borne by the tenant.
Following reform of the rental income tax regime, the obligation on the tenant to withhold and account for tax to the Zambia Revenue Authority (the “ZRA”) has been abolished. A tenant must now pay the gross rent to the landlord without any deductions and the obligation to account for the tax on rental income is now borne by the landlord. Therefore, the reform has now simply shifted the responsibility to remit tax on rented premises onto the landlord.
In addition, the reform has also revised the applicable tax rate for rental income. Under the new regime, two rates will apply: 4% on rental income below K800, 000 per annum and at 12.5% on rental income above K800, 000. Worth noting as well is that landlords earning rental income exceeding K800, 000 per annum and whose income is from commercial rentals, will also be required to register for value added tax (“VAT”) and charge and collect VAT at 16% of their gross rental income
Landlords are therefore required to register for turnover tax with ZRA and possibly for VAT, if the required threshold is met.
Legal implications on Lease agreements that provide for withholding tax
The effect of this tax reform on tenants that were registered for withholding tax is that ZRA will forthwith not require them to be registered for withholding tax as tenants. In the same respect, landlords will now be expected to register for turnover tax instead.
For lease agreements that still provide for withholding tax despite the reform, there will be a need to amend the agreements in order to align them with the current status of the law. Before the amendment is done, however, a practical solution would be to have the tenant start remitting the gross rent to the landlord so as to permit the landlord pay the rental income tax to avoid facing the penalties for failure to comply with the tax regulations. It should be noted that the rental income must be remitted to ZRA within Fourteen (14) days following the month of payment of the rentals by the tenant.
To conclude, it is clear, that the new reform has simply shifted the burden of remitting tax on rental income from the tenant to the landlord. Therefore, all lease agreements that provided for withholding tax must accordingly be amended to reflect the new tax reform in Zambia.