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With holding tax on unit trust
Ericks
#1 Posted : Tuesday, September 15, 2009 7:52:00 AM
Rank: Member


Joined: 7/29/2008
Posts: 170
On Thursday last week (10/09/2009) i saw a communique from KRA in the daily nation newspaper page 25.... indicating that fund managers a required to deduct withholding tax before distributing interest gains to unit holders...

I thought unit trusts and gains from the same are tax exempt,,,,,what does this mean? i have tried to contact the contact person as per that extract without much success...

are there fund managers who are complying to this directive?? and what happens to those who dont like my fund manager..

Its just me whatever choice you make in life make sure that you can live with it.
se7en
#2 Posted : Tuesday, September 15, 2009 8:09:00 AM
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Joined: 11/27/2006
Posts: 108
what do you mean ericks? on what unit trusts? thats the 2nd reason I dont keep my money with Mr. Gulf! kindly clarify...

if you can not be kind,at least have the decency to be vague
speak softly and carry a big stick, you will go far... Theodore Roosevelt
Ericks
#3 Posted : Tuesday, September 15, 2009 8:49:00 AM
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Joined: 7/29/2008
Posts: 170
@ saba

Check daily nation paper dated 10/09/2009... page 25....

Its just me
whatever choice you make in life make sure that you can live with it.
mukiha
#4 Posted : Tuesday, September 15, 2009 9:59:00 AM
Rank: Elder


Joined: 6/27/2008
Posts: 4,114
@Ericks;

Interest income from money-market unit trusts is NOT exempt from tax!

Therefore,Unit managers are required to deduct Withholding tax before paying the interest.

However; capital appreciation of an equity fund unit trust is exempt-there is not capital gains tax in Kenya [they tried to introduce it a couple of years back but parliament shot it down]

FYI: Just to clarify; withholding tax is not a FINAL tax! It is an installment tax. This means that you must pay the full tax (depending on your tax bracket) of the interest earned. Check your tax return form to see how this is done.

Behind the gardens...Behind the wall...Under the tree (Including: Red...Dark Blue...Yellow)
Nothing is real unless it can be named; nothing has value unless it can be sold; money is worthless unless you spend it.
Ericks
#5 Posted : Tuesday, September 15, 2009 10:09:00 AM
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Joined: 7/29/2008
Posts: 170
@ Mukiha,,

Thanks for that clarification... to the best of my knowledge,my fund manager has not been deducting withholding tax from money market interest... whats the implication on my part if KRA knocks the big door demanding for payment of the same.... am i the liable party or will it be my fund manager??? if its the later,can the fund manager pass the load to us unit holders or how would that work??

Its just me
whatever choice you make in life make sure that you can live with it.
mukiha
#6 Posted : Tuesday, September 15, 2009 10:16:00 AM
Rank: Elder


Joined: 6/27/2008
Posts: 4,114
@Ericks;

You will only have a problem with KRA if you have not been declaring the income from your unit trust in your annual return

Remember that the law requires you to declare ALL your income. Have a look at the tax return form and you will see a section on INTEREST INCOME
Deducting [and remitting] withholding tax is the responsibility of the person paying the interest (e.g.,a bank,a fund manager,a client paying a consultant etc) The recipient of the interest (i.e. you) is responsible for declaring it at the end of the year.

FYI: don't fear the taxman; he is actually very friendly when you declare all your income...you can even negotiate a payment plan if you are having cash-flow problems.

Behind the gardens...Behind the wall...Under the tree (Including: Red...Dark Blue...Yellow)
Nothing is real unless it can be named; nothing has value unless it can be sold; money is worthless unless you spend it.
Spetznaz
#7 Posted : Tuesday, September 15, 2009 11:04:00 AM
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Joined: 1/2/2008
Posts: 2
It appears that there are two groups of fund managers ...one has been withholding,and the other group has not been withholding. It will be very interesting how this unfolds. It is potentially one of the most under-reported manenos in the financial markets.

Commonsense is never common
mukiha
#8 Posted : Tuesday, September 15, 2009 11:14:00 AM
Rank: Elder


Joined: 6/27/2008
Posts: 4,114
Spet...who?

that's a difficult one...

Behind the gardens...Behind the wall...Under the tree (Including: Red...Dark Blue...Yellow)
Nothing is real unless it can be named; nothing has value unless it can be sold; money is worthless unless you spend it.
Ericks
#9 Posted : Tuesday, September 15, 2009 11:34:00 AM
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Joined: 7/29/2008
Posts: 170
@ Spec.............

waoh so there have been different practices in this regard? i wonder what happens next...

@ Mukiha....

If i declare my tax returns and indicate appropriately that i earned interest income from a money market fund yet i didnt pay the tax or rather my tax was not withheld,will i be free of blame by KRA,,if anything i have done my part right??
on the same light assuming that the govt issue a directive that from 2day both the unpaid and future WHT be remmitted with immediate effect,who pays the unpaid portion? keeping in mind that some investors might have withdrawn before this directive was issued....

Its just me
whatever choice you make in life make sure that you can live with it.
Spetznaz
#10 Posted : Tuesday, September 15, 2009 11:39:00 AM
Rank: Member


Joined: 1/2/2008
Posts: 2
@ Ericks

I am not sure. I was only told so by a rela who works for a tax/audit companies ...apparently it has been a big undercover issue for months now,and finally KRA has put its foot down. I guess it remains to be seen how the ones that have not been paying will handle it.

I do not think it will affect investors - maybe the companies.


Common sense is never common
mukiha
#11 Posted : Tuesday, September 15, 2009 2:32:00 PM
Rank: Elder


Joined: 6/27/2008
Posts: 4,114
@Ericks;

Let me explain how Withholding tax works,then you will see that you have nothing to worry about as long as you declare the interest earned in your annual tax return.

First,I reiterate that withholding tax is NOT a final tax,it is an installment tax.

Suppose you kept a million bob in one of the good money market funds and earned an average 10%. That's sh100k additional income for you; sio?

Now,suppose further that your fund manager is one of those who have been deducting this withholding tax at the rate of 15% (not sure about the rate)

So,instead of getting the 100k,you actually get 85k plus a withholding tax certificate for 15k

Come the end of the year; you are supposed to declare the full 100k interest and add it to your other income.

Now if you can keep a million bob in a unit trust for a year,your total income must have crossed over into the top tax bracket of 30%.

Therefore,the tax on this interest will be 30% of 100k = 30k.

But 15k has already been deducted through withholding tax. Thus the net tax payable is 15k.

If the withholding tax had not been deducted,then you should pay the full 30k to KRA.

Therefore,in effect,you net interest earned is 70k (or 7%)....this is where the KenGen P.I.Bond is better than other money market investments.....it is tax exempt!!! Presumably,the interest will be accompanied with a tax exemption certificate.

BTW: Even though tax returns are due on June 30th,Tax payments are due on April 30th. So,don't wait until June to pay your taxes; you be hit with penalties for late payment!!! And then you will complain that KRA is unfair [the top of the tax return form states these dates very clearly]

Behind the gardens...Behind the wall...Under the tree (Including: Red...Dark Blue...Yellow)
Nothing is real unless it can be named; nothing has value unless it can be sold; money is worthless unless you spend it.
Ericks
#12 Posted : Tuesday, September 15, 2009 2:57:00 PM
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Joined: 7/29/2008
Posts: 170
@ Mukiha

I salute u for such invaluable wisdom,am smarter now.....

one question u skipped though,what happens to the company that was supposed to withhold the tax but failed to do so??

Its just me
whatever choice you make in life make sure that you can live with it.
Chaka
#13 Posted : Tuesday, September 15, 2009 3:07:00 PM
Rank: Elder


Joined: 2/16/2007
Posts: 2,114
@Mukiha,

Sorry to change the topic but does it also mean that dividend payments should also be declared and if you then fall in the top tax bracket,pay the 25 per cent to the tax man i.e since witholding tax is 5 per cent in this case?




Mkimwa
#14 Posted : Tuesday, September 15, 2009 3:43:00 PM
Rank: Member


Joined: 10/26/2008
Posts: 380
According to the income tax act - third schedule..

The resident withholding tax rates shall be –
(a) in respect of a dividend,ten per cent of the amount payable;
.
.
.
(e) in respect of a qualifying dividend,five per cent of the amount payable,

I have always thought WHT is final tax in some instances.. w.r.t to dividends,i think it is final tax. I stand to be corrected.

cant find my sec 5 notes,i would have confirmed..
Ericks
#15 Posted : Wednesday, September 16, 2009 7:51:00 AM
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Joined: 7/29/2008
Posts: 170
@ mkimwa

for purposes of this post,When is a dividend deemed to be qualifying or non qualifying for that matter?

Its just me whatever choice you make in life make sure that you can live with it.
ecstacy
#16 Posted : Wednesday, September 16, 2009 8:35:00 AM
Rank: Elder


Joined: 2/26/2008
Posts: 4,449
I believe 5% withholding tax applies to Kenyan dividends.
Mkimwa
#17 Posted : Friday, September 18, 2009 12:34:00 PM
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Joined: 10/26/2008
Posts: 380
@Ericks,

The laws definition of qualifying dvidends is very vague.. read this..

'qualifying dividend' means that part of the aggregate dividend that is chargeable to tax under section 3(2)(b) and which has not been otherwise exempted under any other provision of this Act,but shall not include a dividend paid by a designated co-operative society subject to tax under section 19A(2) or 19A(3);'

Generally.. whether a dividend is qualifying depends on the legislation/gazzettment governing the shareholder and company declaring dividends. E.g. a company registered as a bank,or a financial institution licensed under the Banking Act may have different treatment with a normal trading company under the Company's Act,or a SACCO.

Most of the times,dividends from most companies is deemed qualifying.

Qualifying dividends have WHT as a final tax,you need to keep the WHT certificates and use them while filing your tax returns.
mukiha
#18 Posted : Friday, September 18, 2009 1:05:00 PM
Rank: Elder


Joined: 6/27/2008
Posts: 4,114
Well said @Mkimwa; actually,withholding tax on dividends amounts to double-taxation since the dividend is paid from profit after tax....but that on interest income if fair game

Behind the gardens...Behind the wall...Under the tree (Including: Red...Dark Blue...Yellow)
Nothing is real unless it can be named; nothing has value unless it can be sold; money is worthless unless you spend it.
FundamentAli
#19 Posted : Friday, September 18, 2009 1:20:00 PM
Rank: Veteran


Joined: 11/4/2008
Posts: 1,289
Location: Nairobi
@Mukiha,

Even though withholding tax may be double taxation,you are meant to keep the advice slip for your end of year tax returns. I understand you are meant to deduct the withholding tax as tax already paid by you to KRA. Problem is our meager dividends. The process of recovering Shs. 79/- is not worth the effort.




Baada ya dhiki,faaraja
Mkimwa
#20 Posted : Saturday, September 19, 2009 10:00:00 AM
Rank: Member


Joined: 10/26/2008
Posts: 380
@Mukiha..

Alot of our taxes result in double taxation. e.g. say you earn a salary,you are taxed PAYE. In using the Net amount to buy goods,you are charged VAT. in case you decide to import a car,you will be charged import duty + VAT. Say you invest the amount in a business.. any returns from it will be taxed - corporate rate.

In effect,if you fall in the tax bracket of 30% of ur income,you end up giving the govt abt 50% of your hard earned income. You wake up for 2 weeks in a month to work for the govt and people of Kenya. Really pisses me off,if you ask me. 2 weeks in a month is too much.
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