Discuss taxation of the following entities
a) co-operative societies
b) trade associations
c) taxation of clubs
d) charitable trusts
Taxation
of Co-Operative Societies in kenya
Corporative societies become taxable entities with effect from 1st
Jan 1985. This was with the introduction
of sect 19(a) of cap 470. This section
states that, “designated co-operative societies shall be required to pay tax on
their incomes.”
Designated co-operative societies can be broadly classified into 3:
(i) Designated Primary
Co-op societies: These are co-op societies whose members are
individuals. Many of the farmers co-op
societies fall under this category. Such
societies usually deal with tea, coffee, milk, sugarcane etc.
Section 19 (a) (iii) states “In the case of every
designated primary society the income on which tax should be charged shall be
its total income for the year of income, deducting there from an amount equal
to the aggregate of bonuses and dividends declared for that year and
distributed by it to its members in money or an order to pay money.”
Total income
|
xx
|
Less: Allowable Expenses
|
(xx)
|
Adjusted
income
|
xx
|
Less: Bonus and dividends
|
(xx)
|
Taxable
income
|
xx
|
If a primary co-op society pays all the adjusted incomes
as bonuses and dividends, then it shall not pay any tax liability. However, if this is not the case, any income
that remains after distribution of bonuses and dividends shall be taxed at 30%
corporate tax rate.
(ii) Designated Secondary Co-op Societies (Co-op Unions)
These are co-op societies whose members are not
individuals but the designated primary co-op societies. Therefore they act as umbrella bodies of
unions for primary co-op societies.
Examples are KPCU, KFA, Meru Farmers Union (MFU). For tax purposes, sect 19(a)(ii) states, “in
the case of every designated secondary co-op society, the income on which tax
shall be charged shall be the total income for the year of income deducting
there from an amount equal to the aggregate of bonuses and dividends declared
for that year and distributed by it to its members in money or an order to pay
money but the deduction shall in no case exceed that the total income of the
society for that year of income.”
This implies that a designated secondary co-op society can
only pay bonuses and dividends from the current year of income profits but not
from any profits retained in the past years.
Total Income
|
xx
|
Less: Allowable Expenses
|
(xx)
|
Adjusted
income
|
xx
|
Less: bonuses and dividends
|
(xx)
|
Adjusted taxable business income
|
xx
|
Should the co-op society pay all adjusted income as
bonuses and dividends, then no tax liability shall arise otherwise the adjusted
taxable income shall be subjected to 30% corporate tax rate.
(iii) Savings and Credit Co-op Unions/Societies (SACCOs)
SACCOs are typically primary co-op societies since
members are individuals but they carry on the business of savings and credit
where the savings are for members or the credit is granted to the same
members. Therefore this constitutes a
mutual transaction where the saver is the same as the borrower.
Section 19(a)(iv) states, “in the case of a designated
primary society which is registered and carries on business as a credit and
savings co-op society its total income for any year of income shall be deemed
to be the aggregate of;
(a) 50% of its gross income from interest
other than interest from its members.
(b) Its gross income from any right granted for the use or
occupation of any property (rent income and not royalties income).
(c) The gains chargeable to tax under sec 3(2)(f) i.e. deemed
income.
(d) Any other income excluding royalties chargeable to tax under
this Act not falling within a, b and c above ascertained in accordance with the
provisions of this Act.”
NB: If a SACCO or any other
type of co-op society makes a loss in any year of income that loss cannot be
carried forward to be offset against the future profits of the society.
-
The total income of a SACCO shall be subject to 30%
corporate tax rate when determining the tax liability.
-
No allowable expense shall be deducted in determining the
gross rent income. However, a society
shall be granted wear and tear allowance just like any other ordinary business.
-
In case of designated primary co-op societies, dividends
and bonuses shall be treated as deductible expenses (deducted from adjusted
income) under the following conditions;
(i)
They must be paid in cash or by cheque to the members.
(ii)
The payment must be approved at the AGM by the members of
the primary co-op society.
(iii)
The payment must be approved by the commissioner of co-op
societies.
Primary Co-op societies are considered as home-based societies and the
dividend income received by the members is called non-qualifying dividend
income.
With
effect from 1st January 1993, a bonus paid by a co-operative society to its
members is deemed to be a dividend payment subject to withholding tax at the
rate of 15%. In addition, dividends paid by co-operative societies will no
longer be considered as qualifying dividends, i.e. the withholding tax is NOT a
final tax.
TAXATION
OF TRADE ASSOICIATIONS
A trade association is a body of persons which is an
association of persons separately engaged
in any business with the main object of safeguarding or
promoting the business interests of such
persons. However, members of taxable trade associations
are allowed to deduct the subscriptions
in their income tax computation.
Generally trade associations are not considered to be
carrying out trading activities. However,
they may engage in trade. Under section 21(2)of the
income Tax Act, such an association can
choose or elect by notice in writing to the CDT to be
considered to be carrying out business
chargeable to taxin respect to any year of income. In
which case, it’s gross receipts from
the transactions with members(including entrance fees and
subscription fees) and with other
persons is deemed to be income from the business for that
year of income at the corporate tax
rate.
TAXATION
OF CLUBS
Under Section21 of the Income Tax Act, a members club means
a club or similar institution
with all its assets owned by, or held in trust for the
members thereof. The income of clubs is made
up of the gross receipts, including entrance fees, and
subscriptions and such receipts are taxed
in the name of the club at the corporation tax rate.
However, when ¾ or more of such investmentis derived from
members, the body will not be
taken to be carrying on business and no part of such non
investment income will be taxed i.e
income from members is not taxable.
Investment income of a club such as dividends, interest,
rents, capital gains etc are to be excluded
in the ¾ test mentionedabove.-(sec 21(1)
TAXATION OF CHARITABLE TRUSTS
A Charitable Institutions
is defined as
non profit making
organization established in
Kenya
which
Is of public character and •
Has been established for purposes of the relief of
poverty or distress of the public or •
advancement of education.
The income of charitable trusts is exempt under paragraph
10 of the First Schedule to the Income
Tax Act. Under this section, the income of an
institution, body of persons, or irrevocable trust, of
a public character established: solely for the purposes
of:
The relief of the poverty or •
Distress of the public, or •
For the advancement of religion or education established
in Kenya •
For the income to be exempt, any of the following
conditions must also be met:
(i) the business
is carried on in the course of the actual execution of those purposes; or
(ii) the work in
connection with the business is mainly carried on by beneficiaries under
those purposes; or
(iii) the gains or
profits consist of rents (including premiums or similar consideration in the
nature of rent) received from the leasing or letting of
land and chattels leased or let
therewith.
In summary, therefore, the income of a charitable trust
is exempted from tax if:
(i) It is public
in character
(ii) If it is
established for relief of distress or poverty to the public.
(iii) If it is
established to advance religion or education.
(iv) Its total
income is used or spent for charitable purposes.
If a charitable trust runs a business then profits
thereof is not taxed if proceeds are used for
purposes 2 and 3 above.
