Chapter 5

UNIT 5:RENTAL INCOME TAX
Contents
5.0 Aims and Objectives
5.1. Introduction
5.2. Determination of Rental Income
5.3. Summary
5.4. Answer to Check Your Progress Exercise
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Chapter 5
Rental Income Tax
5.1. Introduction
This section covers tax payables on income from rental of buildings. Any income arising from
rental of buildings is taxable under schedule B. The section covers such issues as the
determination of rental income, tax allowable expenses and the obligations of the tax payer
with respect to maintaining proper accounts. The tax is collected on an annual basis and the
tax year is the Ethiopian fiscal year.
5.2. Objectives
After the completion of this section you will be able to:

- Assess tax on schedule B income
- Describe the declaration of rental income
- Identify tax allowable and non-allowable deductions
- Recognize the obligation of the tax payer to maintain proper accounts
5.3. Determination of rental income
5.3.1. General
Rental income includes all form of income from rent of a building and rent of furniture and
equipment if the building is fully furnished. Carefully note that income from the lease of
business, including goods, equipments and building which are part of the normal operation of
a business, (called business lease) are taxable under another schedule – schedule C.
C.
Gross rental income also includes any cost incurred by the lessee for improvement to the land
or building and all payments made by the lessee on behalf of the lessor in accordance with the
contract of lease. There are two parties involved in renting a building – the lessee and the
lessor.
lessor. The party who grants rent of the building is the lessor while the one who leases the
property for use is the lessee. In some occasions the lessor may allow the lessee to sub lease
the building to another party in such circumstances the first lessee will be called sub - lessor.
lessor.
The sub - lessor must pay tax on the difference between income from the sub leasing and the
rent paid to the lessor, provided that the amount received by the sub lessor is greater than the
amount payable to the lessor. The owner of the building who allows a lessee to sub-lease is
liable for payment of the tax for which the sub-lessor is liable, in the event the sub-lesser fails
to pay.
When a building is constructed for the purpose of giving on lease, the owner and contractor
should inform the Kebele Administration about its completion and the intention of giving it
on lease. This is also applicable when the building is rented before its completion. The Kebele
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Administration will pass the information to the tax office for the determination of tax. It is
also the responsibility of Kebele Administration to gather any such information and
communicate to tax office in case where the parties fail to do so.
5.3.2. Taxable income
Gross income includes all payments, either in cash or benefits in kind, received by the lessor
and all payments made by the lessee on the behalf of the lessor. The value of any renovation
or improvement to the land or the building is also part of taxable income under this schedule
if such cost is borne by the lessee in addition to rent payable.
Taxable income from schedule B income is determined by subtracting the allowable

deductions from the gross income. Allowable deductions include the following;
- If the lessor does not maintain books of accounts his allowable deductions
include taxes paid on land and buildings being leased and 20% of the gross
income received as an allowance for repairs, maintenance and depreciation of
such buildings, furniture equipment.
- If the lessor maintains books of accounts the allowable deductions (deductible
expenses) include (but not limited to):-
a. Tax on land and buildings being leased
b. Cost of lease (rent) of land
c. Repairs, maintenance and depreciation of building (and
furniture and equipment if furnished) per income tax
proclamations article 23.
d. Interest on bank loan if any
e. Premium paid on insurance of building.
It is important to keep proper accounts for period of times when the building was not leased
(kept idle).
Activity 1
1. What is the basis of assessment for income assessed

under Schedule B?
2. What deductions are allowable from income assessed
under Schedule B?
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5.3.3. Tax rate
The income tax payable on rented houses shall be charged, levied and collected at the
following rates:
- On income of bodies 30% of taxable income
- On income of persons according to schedule B below.
Schedule ‘B’ Tax Rate
Taxable Income from Rental Income Tax

(per year) Payable
Over Birr To Birr
0.00 1,800. 00 Exempt threshold
1,801 7,801. 00 10
7,801 16,800. 00 15
16,801 28,200. 00 20
28,201 42,600. 00 25
The short cut 42,601 60,000. 00 30 method of
Over 60,000 35 computing the
income tax is:
Annual
Taxable
Income Rate Deduction
0.00 1,800 0 Nil
1,801 7,800 10% 180
7,801 16,800 15% 570
16,801 28,200 20% 1,410
28,201 42,600 25% 2,820
42,601 60,000 30% 4,950
60,001 & above 35% 7,950
Example 1
Total Rental Income of MTZ is Br. 40000 for year 1 costs and expense related to the rental
include.
Repair and Maintenance Br. 2000
Premium paid on insurance Br. 1000
103
Calculate the income tax payable by Mr. X
Solution
Total Taxable rental income is Br. 37, 000 i.e. 40000 minus Allowable deductions Br. 3000.
From To Total Rate Income Tax Payable

0 1800 1800 Exempt 0
1801 7800 6000 10% 600
7801 16800 9000 15% 1350
16801 28200 11400 20% 2280
28201 37000 8800 25% 2200
Total 37000 6430
Shortcut
(Total taxable rental Income x Rate) – Deduction
(Br. 37000 x25%) – Br. 2820
= Br. 9250 – 2820
= Br.
Br. 6430
Example 2
XYZ Co’s total rental income from building for the year ending 20x2 is Br. 250000 and
expenses incurred that are related to the rental of building include:
Tax on building Br. 3000
Repair and Maintenance 4000
Depreciation 6000
Premium paid on Insurance 2500
Calculate the rental income tax payable by XYZ Co for the year 20x2
Solution
Allowable Deductions :
Tax on building Br. 3000
Repair and Maintenance 4000
Depreciation 6000
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Premium paid on Insurance 2500
Total Br.15500
Taxable Rental Income = Total Rental Income – Allowable Deductions

= Br. 250000 – 15500
= Br. 234500
Rental Income Tax = Taxable Rental Income x Rate
= Br. 234500 x 30%
= Br. 70350
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5.5. Summary
Income from rental of building is taxable under schedule B, which covers such issues
as determination of rental income, tax allowable expenses and obligations of the taxpayer.
The tax is collected on an annual basis and the tax year is the Ethiopian fiscal year, i.e.
Hamle 1 to Sene 30.
Taxable income from schedule B income is determined by subtracting allowable
deduction from gross income.
The income tax rate render schedule B is progressive that ranges from 10% to 35%
and making the first Birr 1,800 exempted from tax payments on income of persons. Where as
the rate is 30% person on income of bodies.
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UNIT 5:RENTAL INCOME TAX

After the completion of this section you will be able to:

5.3. Determination of rental income

5.3.2. Taxable income

Taxable income from schedule B income is determined by subtracting the allowable

1. What is the basis of assessment for income assessed

Schedule ‘B’ Tax Rate

Taxable Income from Rental Income Tax

From To Total Rate Income Tax Payable

Taxable Rental Income = Total Rental Income – Allowable Deductions

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