Court of Appeal

COURT OF APPEAL RULING BARS THE KENYA REVENUE AUTHORITY FROM COLLECTING CGT LAND SOLD TO RECOVER DEFAULTED LOANS.

Background of the case

In a notice published in one of the daily newspapers dated 4th October 2016, the Kenya Revenue Authority (KRA) discontinued the manual payment of both stamp duty and Capital Gains Tax (CGT) and required the simultaneous payment of the same online. As a result, in the instance where the bank is auctioning off property that was taken as security for a now defaulted loan, iTax would not accept payment of stamp duty on a transfer until CGT was also paid.

The Judgement

In his ruling, the Judge determined that the banks or the chargee, did not become the proprietor of the property, but of the charge or the instrument that facilitated the transfer after the bank’s customer defaulted on a loan. He determined that it was unfair and irregular for the Revenue Authority to collect CGT from its defaulting borrowers by twinning the payments of CGT and stamp duty, because only after the chargee had received money on transfer of the property, could they then pay rates, rents and taxes. The Banks would like Stamp Duty to remain applicable at the beginning of the transfer process, and Capital Gains Tax to firmly applicable only after receipt of monies from the transfer. CGT is chargeable on the gain accrued from the transfer of the property (Gain = Transfer Value – Adjusted Cost of Property).

Remarks.

This landmark ruling marks a major win for the banks as they are not required to pay CGT upon the sale of land held as security to recover bad loans. It would, therefore, be expected that the banks will credit any surplus funds from sale of property to the defaulting customer’s account, so that the customer can compute any gain realized from the sale and settle any due CGT with the KRA. KRA should develop some rules or regulations that will mandate a bank that has sold a defaulting customer’s property to report such sale to KRA within a certain timeframe and hold onto any surplus funds for a specified period before releasing the same to the customer. The period should be adequate for KRA to reach out to the customer, ask him/ her to declare any gains, and indeed settle any CGT liability, failure to which the KRA can appoint the bank as a collecting agent for the tax, with the tax being payable from the surplus funds held by the bank. We wait to see how this will pan out. This ruling also calls for KRA to reconfigure the iTax platform so as to allow the payment of stamp duty without requiring prior payment of CGT. Whether and how this reconfiguration can only be limited to the benefit of banks who have exercised their statutory power of sale remains to be seen. Carol Muasya is a Senior Advisor at Andersen Tax, Kenya:

carol.muasya@AndersenTax.co.ke

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