Taxable and Non Taxable Incomes For SACCO purposes

Case Study: Tenhos Sacco Society Limited VS KRA

KRA Audited Tenhos for the year 2015-2017.

In preparing its books of accounts, TSSL had classified its incomes and expenses into either BOSA or FOSA.

Back Office Services Activity (BOSA) enables a member to make deposits and access credit services(the traditional role of a SACCO).

FOSA stands for Front Office Services Activities. This is the banking arm of the SACCO which offers savings as well as transactional accounts through which you can access your money while you are still a continuing member of the SACCO

Most of the Income generated from BOSA is non-taxable since it is normally generated from interest attributable to lending to SACCO’s members. TSSL had assumed that all incomes generated under BOSA were exempt.

KRA had reclassified the incomes into either taxable or exempt in its assessment. KRA had further used the ratio of incomes to allocate deductible expenses and expenses relating to exempt income.

The reclassification of incomes & expenses by KRA resulted in a higher income tax than previously filed by TSSL

On 10/04/2019, KRA made an additional assessment worth KES 5.6m with respect to 2016 and 2017 income tax

Upon unsuccessful objection, TSSL appealed to TAT on 11/09/2019

TSSL argued that:

• ?????KRA had relied upon an apportionment formula instead of the real transactions as posted in the books of accounts.
• ????The Apportionment method was not scientific
• ???It had provided all documentary evidence to prove its assertions
• ???At the beginning Overheads from BOSA Activities were low or non-existent as the employer’s facilities were used at no cost. At times officials of the SACCO would also volunteer.
• ??The Income Tax Act does not have a provision for apportionment of expenditure between taxable and exempt income.

KRA responded that:

• ????????TSSL had misinterpreted the provisions of the Income Tax Act by breaking down its income into BOSA and FOSA instead of taxable and exempt.
• ?????Some BOSA incomes??such?as entrance Fees, MPESA Fee,50% of interest income, commission on cash withdrawal?etc were taxable
• ????Use of ratios to allocate expenses was scientific.
• ?????76% of the expenses was attributable to exempt income and therefore not allowable.

In its ruling on 28/01/2022, the TAT observed that:

• ??The Income Tax Act Section 19 A(4) provides that-

In the case of a designated primary society which is registered and carries on business as a credit and savings co-operative society its total income for any year of income shall, notwithstanding any other provisions of this Act, be deemed to be the aggregate of—

(a)fifty per centum of its gross income from interest (other than interest from its members);

(b)its gross income from any right granted for the use or occupation of any property, not being a royalty, ascertained in accordance with the provisions of this Act;

(c)gains chargeable to tax under section 3(2)(f);

(d)any other income (excluding royalties) chargeable to tax under this Act not falling within paragraph (a), (b) or (c) ascertained in accordance with the provisions of this Act.

As such only 50% of the gross interest is exempt from taxation. Any other income is taxable

• Section 19A(4) above doesn’t recognize BOSA and FOSA, it recognizes exempt or taxable income
• ?Apart from classifying incomes as either BOSA or FOSA, TSSL should have gone further to classify the?incomes into either taxable or exempt
• KRA had used?‘its?best judgment’?as provided for by the law in assessing TSSL

As Such TSSL lost