Withholding tax on rent: Get it right
Correspondent | Monday August 18, 2014 08:55
This tax was brought into force through Income Tax Amendment Act No. 8 of 2011. Despite the fact that this law has been in force for more than three years now, it appears that some tenants are still unaware of the tax. In this article, we will provide some guidance for tenants to help them fully comply with the requirements of the Tax Act regarding the withholding tax.
The withholding tax is required to be deducted on all rental payments, whether they are made to residents or non-residents of Botswana. Technically, the withholding tax should be deducted from the gross rent due to a landlord, i.e. before VAT, where applicable. For example where a tenant is to pay rent of say P112,000, inclusive of VAT, the withholding tax would be determined on the VAT-exclusive amount, i.e. P100,000. It is important to note that the withholding tax should only be deducted on amounts paid for the ‘use of any land or buildings or both.’ As such, the withholding tax is applicable to rental payments only and does not apply to cost recoveries such as electricity, water etc.
No withholding tax is deductible if the annual rent is less than P36,000. Given that rental payments are usually done on a monthly basis, it appears there is a practice of deducting the withholding tax only on the amount in excess of P 3,000. It should be noted that once the rental amount is P 3,000 or more, the five percent withholding tax is deductible on the full amount.
The withholding tax is required to be deducted even when an employer pays rental payments to an individual in respect of premises rented by the employer on behalf of his employees. The fact that an employee is taxed on the housing benefit does not have any effect on the requirement for the employer to deduct withholding tax on such payments.
The Income Tax Act Chapter 52:01 (the Tax Act) however provides that the withholding tax should not be deducted in instances where rent is paid by an individual who does not claim the rent as a tax deduction (expense for tax purposes). In simple terms, this exempts individuals who occupy the rented buildings for their private usage, i.e. for residential purposes. If the individual is, for example, a doctor who rents a residential building for his practice, he/she should deduct the withholding tax as he/she will claim the rent as a tax deduction.
Some landlords seek the assistance of real estate agents or other such persons to administer the maintenance of their premises, including the collection of rentals.
In such cases, the tenant would pay the rental to the agent and the latter would forward the rent, net of his/her charges, to the landlord. The tenant is still required to withhold the tax, regardless of how, where or to whom the rent is paid. For example the payment of rent to an estate agent is regarded as a payment to the landlord.
The tenant is required to issue a withholding tax certificate to the landlord, currently Form ITW 9, as proof of withholding. The withholding tax certificate, which should be stamped by BURS, can be used by the landlord to claim a credit against his/her final Income Tax. In other words, the withholding tax is an advance tax, i.e. it is paid in advance to BURS but is claimable by the landlord at year-end.
Just like any other withholding tax, the tax so deducted is required to be remitted to BURS by the 15th day of the month following that in which payment of the rent is done. Withholding tax for a payment made in July 2014 would be due to BURS not later than August 15, 2014. BURS charges compound monthly interest of 1.5% for late payments of the withholding tax.
It is important to note that, legally, withholding tax is triggered by payment and not accrual of the rent. This means that withholding tax should be accounted for when the rent is paid, regardless of the provisions of the lease agreement or other legal document giving rise to the rent.
Many tenants find themselves in a situation where they would not have deducted the rent on previous payments and then have to rectify the situation. The Tax Act requires such tenants to pay the full withholding tax to BURS. It also provides that they can recover the tax paid from the landlord.
We suggest, in such cases, that sufficient communication between the landlord and the tenant takes place before the recovery of the tax is done. Interest charged for the late remittance of the withholding tax is borne by the tenant. Such interest cannot be recovered from the landlord because the tenant is penalised for failure to comply with his/her withholding obligations under the Tax Act.
Tenants are required to comply with the tax and seek guidance, where not certain.
Comments on this article can be forwarded to taxservices@kpmg.bw
Disclaimer: The information contained in this article is of a general nature and is not meant to address particular circumstances of any person. KPMG does not accept legal liability for any loss occasioned through the reliance of information contained in this article.