Rental Income Tax

3.
Rental Income Tax
1
contents
Overview of Rental Income Tax
Basic Legal Provisions for Rental Income
Tax
Accounting for rental income tax
2
Rental Income Tax Basics
Rental Income
Refers to Income from rental of buildings.
Does not include income from lease of business and
income from casual rental of property
Business lease means lease of goods, equipments and
building which are part of the normal operation of a
business
Rental Income Tax
Rental Income is taxed under Schedule “B” of Income
Tax Proclamation No. 979/2016 and Regulation No.
410/2017
3
Rental Income Tax Basics : -cont'd
A lease is a contractual arrangement calling for the lessee
(user) to pay the lessor (owner) for use of an asset.
Parties in Rental of buildings
1. Lessor: a person who owns building and who provides
building rental service
2. Lessee: a person who rents/leases a building directly from
the lessor for residential, business or subleasing purpose.
3. Sub-lessor: the first lessee that sub-leases the whole or a
portion of the building
4. Sub-lessee: the third party who rents the building from
the sub-lessor
4
Rental Income Tax Basics : -cont'd
Sub-lessor shall pay the tax in the difference between
income from sub-leasing and the rent paid to the lessor
provided that the amount received by the sub-lessee is
greater than the amount payable to the lessor.
The owner of a building who allows a lessee to sub-lease is
liable for the payment of the tax for which the sub-lessor is
liable, in case the sub-lessor fails to pay.
The leased building can be empty or furnished
Income that covers a period longer than one year (Advance
Payments) shall be prorated over the number of years
covered by the amount paid for tax purposes (this is only for
those tax payers who do not maintain book of accounts).
5
Taxable Rental Income
Taxable Rental Income

= Gross Rental Income
- Deductible Expenses
6
Determination of Gross Rental Income
Gross Rental income shall include:
 All amounts derived by the tax payer during the year under
the lease agreement, including any lease premium or similar
amount;
 All payments made by the lessee during the year on behalf of
the lessor according to the contract of lease
 The amount of any bond, security, or similar amount that,
during the year, the tax payer is entitled to retain as a result of
damage to the building and that has not been used by the tax
payer in repairing the damage to the building;
 The value of any renovation or improvement made under the
lease agreement to the building when the cost was borne by
7 the lessee in addition to the rent payable to the tax payer.
Gross Rental Income…
If the tax payer leased furnished building, amount of income
attributable to the lease of furniture or equipment.
8
Deductible Expenses from Gross Rental Income
If the tax payer does not maintain book of

account:
Any fees and charges, but not tax, levied by a state
or city administration in respect of land or building
leased and paid by the tax payer during the year.
An amount equal to 50% of the gross rental income
derived by the tax payer for the year as allowance
for the repair, maintenance, and depreciation of the
building, furniture, and equipment.
9
For those Maintaining Book of accounts
Any expenditure, to the extent necessarily incurred in deriving
rental income and paid during the year including:
Cost of lease of land on which the building is situated
Repair and maintenance
Depreciation expense for the building, furniture and equipment
Interest and insurance premiums;
Interest Expense
Fees and charges, but not tax, levied by a state or city
administration in respect of the land or building leased.
General and administrative expenses
10
Tax Rates
On rental income of a body, 30% of Taxable

Rental Income
On income of persons other than a body
according to the Schedule B
11
Schedule “B” Rental Income Tax Rate
TB Income T RI Tax Rate
1st 0 7,200 ––– 0%

2nd 7,200 19,800 12,600 10%
3rd 19,800 38,400 18,600 15%
4th 38,400 63,000 24,600 20%
5th 63,000 93,600 30,600 25%
6th 93,600 130,800 37,200 30%
7th 130,800 ***** ––– 35%
Rental Income Tax Rate (Schedule B)
TB Over To Tax Rate Deduction
1st 0 7,200 0% 0.00

2nd 7,200 19,800 10% 720.00
3rd 19,800 38,400 15% 1710.00
4th 38,400 63,000 20% 3,630.00
5th 63,000 93,600 25% 6,780.00
6th 93,600 130,800 30% 11,460.00
7th 130,800 ***** 35% 18,000.00
Example 1
Assume ATO AYELE, the owner of AYU BUILDING,
leased the Building at Br 1,200,000 per annum. The
cost of the building is Br 10,000,000 and the following
expenses are incurred by the lessor:
Cost of Lease payments on Land Br 10,000
Repair and Maintenance expenses 200,000
Other Deductible Cash Expenses 50,000
Required: Determine the Gross Rental Income,
Taxable Rental Income, and Rental Income Tax
assuming a) Ato Ayele maintains books of records and
b) he doesn’t maintain book of records
14
Example 2
Habesha Rental Plc involves in renting of dwelling houses
around Bole. For the year ended Sene 30, 2011, the firm has
processed the following transactions.
 Recognized income from renting of building Br.
100,000/month. The associated furniture and equipment were
rented at a per month rate of Br. 50,000.
 The cost of the building owned by the company is Br.
5,000,000 and the cost of the furniture and equipment is Br.
1,000,000.
 The Company paid lease of Br 25,000 during the year
 General and administrative expenses of Br. 40,000 were also
paid.
Required:- Compute the taxable income and tax liability for
15
the year 2011.
Exercises
Exercise 1 : Biftu Plc leased its building for Br 200,000
for cash per month. The cost of the building is Br
10,000,000. Biftu Plc paid Br 100,000 for the leasehold
Land. General administrative costs of Biftu on the
building rental are Br 150,000 per year.
Required: Determine Rental Income Tax Liability of
Biftu
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End of the Unit
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3.

Rental Income Tax

Taxable Rental Income

If the tax payer does not maintain book of

On rental income of a body, 30% of Taxable

1st 0 7,200 ––– 0%

TB Over To Tax Rate Deduction

1st 0 7,200 0% 0.00

Exercise 1 : Biftu Plc leased its building for Br 200,000

for cash per month. The cost of the building is Br

10,000,000. Biftu Plc paid Br 100,000 for the leasehold

Land. General administrative costs of Biftu on the

building rental are Br 150,000 per year.

Required: Determine Rental Income Tax Liability of

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