1. Rental Income Tax Accounting
Chapter four
Rental Income Tax Accounting

2. contents Overview of Rental Income Tax
Basic Legal Provisions for Rental Income Tax
Accounting for rental income tax

3. Rental Income Tax Basics
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 business
Rental Income Tax
income tax imposed on income from rental of buildings.
Rental Income is taxed under Schedule “B” of Income Tax Proclamation No. 286/2002 and Regulation No. 78/2002

4. 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 Rent of buildings
Lessor: a person who owns building and who provides building rental service
Lessee: a person who rents/leases a building directly from the lessor for residential, business or subleasing purpose.
Sub-lessor: the first lessee that sub lease the whole or portion of the building
Sub lessee: the third party who rents the building from the sub lessor

5. 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 from the sub-lessor 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 the event 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.

6. Determination of Gross Rental Income
Gross Rental income shall include:
All payments in cash and all benefits in kind received by the lessor (owner of the building) from the lessee;
All payments made by the lessee on behalf of the lessor according to the contract of lease
The value of any renovation or improvement made under the contract of lease to the land or building, where the cost of such renovation or improvement was borne by the lessee in addition to rent payable to the lessor;
If the tax payer leased furnished quarters the amounts received attributable to the lease of furniture and equipment shall be included in Gross Rental Income in addition to the above rental incomes.

7. Deductible Expenses from Gross Rental Income
Deductible expenses Include
Taxes paid with respect to the land and buildings being leased and:
For taxpayers not maintaining books of account, one fifth (1/5) of the gross income received as rent for buildings, furniture and equipment as an allowance for repairs, maintenance and depreciation of such buildings, furniture and equipment;
For taxpayers maintaining books of account, the expenses incurred in earning, securing, and maintaining rental income, to the extent that the expenses can be proven by the taxpayer and subject to the limitations specified in Proclamation No.286/2002
Cost of lease/rent for the land
Insurance premium for the property
Deprn expense for the property
Repair and maintenance of the property
Interest on bank loans
General and administrative expenses

8. Tax Rate
On rental income of body 30% of Taxable Rental Income
On income of persons according to the Schedule B
Schedule B TB
Income
T RI
Tax Rate
1st
1800
–––
Exempt (0%)
2nd
1,800
7,800
6,000
10%
3rd
16,800
9,000
15%
4th
28,200
11,400
20%
5th
42,600
14,400
25%
6th
60,000
17,400
30%
7th
*****
35%

9. Accounting for Rental Income Tax
Involves with the following tasks:
Determination of Gross Rental Income and Taxable Rental Income
Calculation of Rental Income Tax
Preparation of Rental Income Tax Return

10. Determination of Gross Rental Income
Rental Income Received
xxxxx
Amount on the lease of furniture
Amount on the lease of equipments
Payments made by the lessee on behalf lessor
Cost renovation/improvement paid by the lessee
Gross Rental Income

11. Determining taxable rental income
To compute the taxable amount, apply the following schedule
Gross Rental Income
xxxxx
Less: Rental Payment (Applied by sub lessor)
(xxxxx)
Net Rental Income
Less: deductible expenses
Taxable rental income
XXXX

12. Computing rental income tax
For Bodies apply flat 30 % rate of taxable rental income
For other tax payers apply the bellow schedule
RIT = Taxable Rental Marginal Tax Rate – Deduction TB
Over To
Tax Rate
Deduction
1st
1,800
Exempt
0.00
2nd
7,800
10%
180.00
3rd
16,800
15%
570.00
4th
28,000
20%
1,410.00
5th
28,200
42,600
25%
2,820.00
6th
60,000
30%
4,950.00
7th
*****
35%
7,950.00

13. Example 1
Assume ATO AYELE, the owner of AYU BUILDING, leased the Building at Br 2,000,000 per annum. In addition to this, the lessee will incur Br 100,000 per annum for repair and maintenance of the building. Ato Ayele maintains books of Accounts and the cost of the building is Br 20,000,000 and the following expenses are incurred by the lessor:
Required: Determine the Gross Rental Income, Taxable Rental Income, and Rental Income Tax
Cost of Lease payments on Land
Br 100,000
Land and Building Tax
4,800
Other Deductible Expenses
5,200

14. Example 2
Habesha PLC involves in renting of dwelling houses around Bole. For the year ended Sene 30, 1998, the firm has processed the following transactions.
Recognized income from renting of building Br. 65,000/month. The associated furniture and equipment were rented at a per month rate of Br. 20,000.
The value of building owned by the company is Br. 5,000,000 and the value of furniture and equipment is Br. 1,000,000.
The company paid land tax of Br. 10,000/year.
General and administrative expenses of Br. 40,000 were also paid.
Required:-With the assumptions of Habesha PLC maintains records and did not maintain records, compute the taxable income and tax liability for both assumptions for the year 1998.

15. Exercise s
Exercise 1 : Biftu Plc leased its building for Br 200,000 for cash per month. The lessee is responsible to make renovation and improvement in the building by incurring Br 100,000 per year as per the lease term. The cost of building is Br 10,000,000. Biftu Plc paid Br 100,000 for the lease hold Land. General administrative costs of Biftu on the building rental are Br 150,000 per year.
Required: Determine Rental Income Tax Liability of Biftu

16. Exercise s - cont'd
Exercise 2: ATO ZINABU leased his furnished building for Br 2,000 per month and the equipments and furniture were leased for Br 1,000 per month. He paid Br 1,200 land and building tax to Addis Ababa Municipality.
Determine Gross Rental Income, Taxable Rental Income and Rental Income Tax Liability assuming that the house was vacant for four months during tax year 1999

17. Rental Income Tax Declarations
RIT Declaration with books of accounts (FORM 1201)
RIT Lessee Details Declaration and Continuation Sheet (FORM 1202 and FORM 1203)
RIT Declaration for taxpayers not maintaining Books of Accounts (FORM 1205 & FORM 1206)

18. End of chapter