Centum Investment Company Plc #ticker:CTUM has reviewed taxes payable on its investment properties to Sh4 billion, raising the figure six times from the previous Sh669.9 million.
The company says in its latest annual report that it used to assess tax payable on revaluation gains in its real estate portfolio based on the capital gain tax (CGT) rate of five percent.
It has now adopted the corporate income tax rate of 30 percent following a recent decision by the Tax Appeals Tribunal which concluded that entities involved in sale and development of land ought to be taxed at the higher rate as this is their normal business.
Adoption of the 30 percent tax in the year ended December saw Centum restate its prior year’s retained earnings and deferred income tax.
“For investment properties, where realization is expected to be through sale or development and sale of the property, management has established that deferred tax should be determined at the statutory income tax rate of 30 percent as the entity is deemed to be trading in land/properties rather than holding them for capital appreciation,” the company says in the report.
“A recent ruling at the Tax Appeals Tribunal in a matter involving a property developer with similar business model to Vipingo Development/Vipingo Estates also concluded that the applicable tax rate for entities involved in sales and development of land is the income tax rate of 30 percent, and not the CGT rate of 5 percent.”
Centum had booked cumulative revaluation gains of Sh13.3 billion in its investment properties between 2019 and 2020 and which showed a deferred tax assessed at Sh669.9 million based on the previous CGT rate of five percent.
Those gains have now generated a deferred tax of Sh4 billion based on the 30 percent corporate income tax, raising the obligation by Sh3.3 billion.
“The deferred tax has no cash flow implication, but it reduces the book value of shareholder funds and transfers the capital to a deferred tax account which is in effect an early recognition of tax,” Centum’s chief finance officer Wambua Kimeu writes in the report.
“At the point of conclusion of a sale of any portion of the land, this account will be reduced by the actual tax payments.”
The company recently consolidated most of its real estate ventures into its fully-owned subsidiary Centum Real Estate Limited. Centum, however, continues to hold Two Rivers Development Limited directly.