Landlords Must Notify KRA Before They Opt Out Of MRI

The Tax Appeals Tribunal’s decision in Ibongia ta Quantech Consultancy v. Commissioner of Domestic Taxes provides important guidance on how the Monthly Rental Income (MRI) regime interacts with a taxpayer’s other business income. While the case also involved disputed VAT input claims, the MRI aspect turns on a narrow but critical issue: the taxpayer’s failure to prove that it had validly opted out of the final MRI tax, with the result that expenses attributable to rental income were correctly disallowed.

Factual Background

The Appellant was a quantity surveying consultancy. In its audited financial statements for the years 2020–2022, it declared two sources of income:

• Consultancy fees (its principal business activity).
• Rental income, disclosed under “other income”.

Alongside the rental income, the Appellant claimed various expenses (building materials, wages, repairs, electrical items, etc.) which it sought to deduct against its overall income.

The Kenya Revenue Authority (KRA) conducted a review and noted that the Appellant had been filing its rental income under the Monthly Rental Income (MRI) regime – a final tax under Section 6A of the Income Tax Act and the Residential Rental Income Tax Regulations (Legal Notice No. 106 of 2016) .

The KRA’s position was straightforward:

• Because the rental income was subject to MRI as a final tax, it was not part of the chargeable income against which expenses could be deducted under the ordinary income tax rules.
• Consequently, the expenses that related to that rental income (e.g., building materials, wages) were not allowable deductions against the Appellant’s consultancy income.
• The KRA therefore disallowed those expenses and issued additional income tax assessments.

The Appellant objected, arguing that the expenses were incurred wholly and exclusively in the production of income and were deductible under Section 15 of the Income Tax Act. The KRA confirmed its objection decision, and the Appellant appealed to the Tribunal.

The MRI Legal Framework

The Tribunal set out the relevant provisions of the Residential Rental Income Tax Regulations (Legal Notice No. 106 of 2016) :

• Regulation 3 imposes MRI on persons who derive gross rental income from residential property.
• Regulation 4 provides the mechanism for exclusion:

A person who opts not to be subject to the residential rental income tax under section 6A of the Act shall notify the Commissioner at least three months before the end of the year of income.

• Regulation 5 confirms that any income subject to MRI is a final tax and “shall not be liable to any other tax under the Act.”
• Regulation 6 requires persons subject to MRI to keep records.

The Tribunal emphasized that MRI is a self-contained final tax regime. If a taxpayer falls within it, the rental income is not aggregated with other income, and no deductions attributable to that rental income are available against the taxpayer’s other income.

The Tribunal’s Analysis

The Appellant’s Failure to Prove Opt‑Out

The Tribunal observed that the Appellant had not provided any evidence that it had notified the Commissioner of its election to be excluded from MRI. The Appellant’s own filings showed that it had been filing MRI returns for the rental income. Under Regulation 4, the only way to avoid being subject to MRI is to give written notice to the Commissioner at least three months before the end of the year of income.

The Tribunal stated:

“The Tribunal has not sighted any documents presented by the Appellant that would clarify whether the Appellant indeed declared its rental income under the simplified tax of the MRI or whether it sought permission from the Commissioner to be excluded from the same and declare this income as part of the other income of its business.”

Because the Appellant had not proven that it had validly opted out, the Tribunal held that the rental income remained within the MRI final tax regime. Consequently, the expenses claimed in relation to that rental income were correctly disallowed by the KRA.

The Burden of Proof

The Tribunal repeatedly cited the statutory burden of proof:

• Section 56(1) of the Tax Procedures Act: “In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”
• Section 30 of the Tax Appeals Tribunal Act: In an appeal relating to an assessment, the appellant has the burden of proving that the assessment is excessive.

The Appellant had argued that the expenses were deductible, but it produced no documents – no copy of the required notice to the Commissioner, no correspondence showing an election to be excluded from MRI, and no evidence to explain why the expenses should be allowed despite the final tax regime. The Tribunal found that the Appellant had failed to discharge its burden.

The Tribunal’s Conclusion on MRI

The Tribunal upheld the KRA’s Objection Decision. On the MRI issue, the key holding is:

• A taxpayer who wishes to have rental income taxed under the ordinary income tax rules (and therefore claim deductions for rental expenses) must give written notice to the Commissioner under Regulation 4 of Legal Notice No. 106 of 2016.
• Failure to provide evidence of such notice means the taxpayer is deemed to be within the MRI final tax regime, and expenses attributable to the rental income are not deductible against other income.

What the Case Does Not Stand For

It is important to clarify what the decision does not establish:

• The case does not hold that MRI is mandatory for all landlords. The regulations explicitly allow a landlord to opt out by giving notice. The problem here was the complete absence of evidence that the Appellant had taken that step.
• The case does not create a “trap” where silence automatically subjects a landlord to MRI. Rather, it reaffirms that if a taxpayer chooses to be outside MRI, the law requires a proactive notification, and the taxpayer bears the burden of proving that notification was given.
• The case does not address the merits of whether the expenses themselves were legitimate. The Tribunal never reached that question because the Appellant failed to establish the preliminary point that it was not under MRI.

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