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Homeowner’s nightmare: The looming tax on imaginary rent

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Imputed Rental Income Tax

by Sherika De Silva

LLB (University of London)
Bachelor of Commerce (Special) Degree in Business Technology (University of Kelaniya)
CIMA – Passed Finalist
Tax Analyst at KPMG

Sri Lanka is set to introduce a new tax on homeowners as part of a wider effort to boost Government revenue. This levy, known as the Imputed Rental Income Tax (IRIT), will extend to both owner-occupied and vacant residential property. The tax burden will be determined by the deemed rental income these homeowners could generate if they rented out their homes.

While the IRIT is expected to bring in new revenue for the Government, whether this will translate into significant revenue generation is still uncertain. The IMF Staff Level Report, published recently, recommends seeking the Parliamentary approval of revenue measures for the 2025 Budget ahead of the Presidential Elections. Additionally, it emphasizes the need to expedite preparatory work for the IRIT’s implementation before the beginning of the tax year, April 2025.

Sri Lanka’s housing policy strives to achieve shelter for all by 2025. However, the proposed IRIT may inadvertently create a disincentive for homeownership, potentially undermining the very goal of the housing policy. Hence, the IRIT brings about a clear contradiction between Sri Lanka’s housing policy and tax policy.

What is IRIT in General?

Sri Lanka’s tax system adheres to the principle of taxation on realized income. This means that taxpayers are generally liable for taxes only on income they have actually earned, not on potential future earnings. Exceptionally, the tax laws outline specific instances where income tax applies to unrealized income.

The concept of “imputed income” is the focal point of IRIT, which mandates the payment of taxes on income that may never materialize. In simpler terms, taxpayers would be liable for taxes on a fictional/ hypothetical income, not on actual earnings they receive. Taxation ideally reflects the economic realities of income generation. If income isn’t received, the burden of taxation on such “imputed income” can create a significant financial strain for taxpayers.

Income tax operates on a clear principle: individuals receive income and contribute a share to the State through tax payments. However, the IRIT introduces a novel concept – taxation on “imaginary income”. The potential disconnect between this imaginary income and the taxpayer’s financial reality sparks debate about the fairness and equitability of the IRIT.

It is worth noting that a similar tax (Net Annual Value concept) was previously included in the Inland Revenue Act. No. 10 of 2006. Under this regime, the “net annual value of not more than one place of residence, owned by and occupied by or on behalf of an individual” was exempt and the assessed values for rating purposes were used to determine the base. The concept of Net Annual Value extended to land and improvements thereon.

Is IRIT a Common Concept in the Global Tax System?

The concept of taxing the potential rental income, or “imputed rent,” on owner-occupied properties is rare, and it is only implemented by a select few OECD nations: Denmark, Greece, the Netherlands, and Switzerland.

According to Swiss tax law, a resident taxpayer owning a house or an apartment and living in this house or apartment is generally taxed on the deemed rental value of this property, which will be added to the individual’s taxable income.

In order to determine the imputed rental value of a home, Swiss authorities consider several factors such as the property value (including land and construction costs), living space, age, and location. The tax administration in the Canton of residence then compares or estimates how much rent a similar property costs. Generally, the imputed rental value falls between 60% and 70% of the potential rental income.

While both Greece and Sri Lanka faced economic challenges necessitating IMF intervention, their approaches to taxation differ. Greece imposed an imputed income tax on luxury living such as private cars with large engine power, airplanes, helicopters, swimming pools as well as private yachts/boats exceeding five meters. In contrast, Sri Lanka is set to implement IRIT primarily targeting homeowners.

Understanding the Rationale for IRIT in Switzerland and other similar nations

The rationale behind the IRIT implemented in Switzerland centres on achieving tax parity between homeowners and renters.

Traditionally, renters pay tax on their income but cannot deduct their rent payments, a significant expense. Conversely, homeowners can deduct mortgage interest and maintenance costs from their taxable income, reducing their overall tax burden. This tax system that favoured homeowners over renters, created a disparity. The introduction of the IRIT aimed to rectify this imbalance by imposing a tax on imputed rental income of homeowners.

As a means of achieving the objective of creating tax parity, when IRIT was introduced, homeowners were allowed to deduct certain expenses such as maintenance costs and mortgage interest expenses in order to offset the imputed income charge.

Is there a Rationale for IRIT in Sri Lanka?

Given the absence of deductions for mortgage interest and maintenance expenses for homeowners in Sri Lanka, unlike Switzerland that has introduced IRIT, the rationale behind Sri Lanka’s implementation of IRIT becomes questionable. Maybe if IRIT is to be implemented, policymakers should provide a deduction for mortgage interest and maintenance expenses to Sri Lankan taxpayers.

Sri Lanka’s tax landscape regarding deductions for expenses incurred by homeowners, has undergone several changes over the years, with amendments to income tax laws. The previous Inland Revenue Act (No. 10 of 2006) allowed deductions for capital repayments and interest payments on approved housing loans obtained before 01 April 2011. The subsequent Inland Revenue Act (No. 24 of 2017) introduced an expenditure relief for interest on housing loans. However, this relief was abolished in December 2022. Consequently, the current tax system in Sri Lanka offers no deductions for either housing loan interest or any other housing-related costs.

Unlike countries like Switzerland, since there is no deduction currently available for homeowners in Sri Lanka, there is no disparity between homeowners and renters. Therefore, implementing IRIT in Sri Lanka without allowing deductions may end up creating a disparity and this would discourage the concept of homeownership, and favour living in rented houses.

Therefore, to mitigate potential inequities arising from the implementation of IRIT in Sri Lanka, policymakers should consider establishing an allowance for deductions such as mortgage interest, maintenance cost and similar expenses as referred to above. This would ensure a level playing field and achieve true tax neutrality for homeowners. Without such deductions for mortgage interest and maintenance costs, homeowners would shoulder a disproportionate tax burden.

First House Exemption

Recent comments made by policymakers in Sri Lanka in relation to the implementation of IRIT as per the IMF Report, suggests that the focus of IRIT is on high wealth individuals, and not on average income earners. Further, policymakers have indicated that an exemption would be granted for primary residences.

The “Net Annual Value” concept in the IRA 2006, is criticized in the IMF report for its reliance on exemptions (such as exempting the primary residence) and the use of assessed values. The IMF report also states that IRIT would be implemented with an exemption threshold and a graduated tax rate schedule, which would make this tax highly progressive. However, there is no indication whatsoever in the IMF report with regard to the “first house exemption.” Nonetheless, it is very likely that a first house exemption would be included when the law is being passed.

Granting a first-house exemption, while potentially appealing to some taxpayers, may undermine the revenue targets associated with the IRIT. The IMF report estimates that the IRIT should contribute 0.15% to Sri Lanka’s GDP. However, a broad exemption for primary residences could significantly reduce the IRIT tax base, posing a challenge for the Government in achieving its projected revenue goals.

Despite the ambiguities surrounding the implementation of the IRIT, the use of fictional income for taxation would surely create a significant change to the existing taxing mechanism used in Sri Lanka’s tax framework. Moreover, this approach will impose a substantial financial burden on taxpayers as they will be taxed on imputed, rather than actual earnings.

(Views expressed in this article are personal.)



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Features

US’ drastic aid cut to UN poses moral challenge to world

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An UN humanitarian mission in the Gaza. [File: Ashraf Amra/Anadolu Agency]

‘Adapt, shrink or die’ – thus runs the warning issued by the Trump administration to UN humanitarian agencies with brute insensitivity in the wake of its recent decision to drastically reduce to $2bn its humanitarian aid to the UN system. This is a substantial climb down from the $17bn the US usually provided to the UN for its humanitarian operations.

Considering that the US has hitherto been the UN’s biggest aid provider, it need hardly be said that the US decision would pose a daunting challenge to the UN’s humanitarian operations around the world. This would indeed mean that, among other things, people living in poverty and stifling material hardships, in particularly the Southern hemisphere, could dramatically increase. Coming on top of the US decision to bring to an end USAID operations, the poor of the world could be said to have been left to their devices as a consequence of these morally insensitive policy rethinks of the Trump administration.

Earlier, the UN had warned that it would be compelled to reduce its aid programs in the face of ‘the deepest funding cuts ever.’ In fact the UN is on record as requesting the world for $23bn for its 2026 aid operations.

If this UN appeal happens to go unheeded, the possibilities are that the UN would not be in a position to uphold the status it has hitherto held as the world’s foremost humanitarian aid provider. It would not be incorrect to state that a substantial part of the rationale for the UN’s existence could come in for questioning if its humanitarian identity is thus eroded.

Inherent in these developments is a challenge for those sections of the international community that wish to stand up and be counted as humanists and the ‘Conscience of the World.’ A responsibility is cast on them to not only keep the UN system going but to also ensure its increased efficiency as a humanitarian aid provider to particularly the poorest of the poor.

It is unfortunate that the US is increasingly opting for a position of international isolation. Such a policy position was adopted by it in the decades leading to World War Two and the consequences for the world as a result for this policy posture were most disquieting. For instance, it opened the door to the flourishing of dictatorial regimes in the West, such as that led by Adolph Hitler in Germany, which nearly paved the way for the subjugation of a good part of Europe by the Nazis.

If the US had not intervened militarily in the war on the side of the Allies, the West would have faced the distressing prospect of coming under the sway of the Nazis and as a result earned indefinite political and military repression. By entering World War Two the US helped to ward off these bleak outcomes and indeed helped the major democracies of Western Europe to hold their own and thrive against fascism and dictatorial rule.

Republican administrations in the US in particular have not proved the greatest defenders of democratic rule the world over, but by helping to keep the international power balance in favour of democracy and fundamental human rights they could keep under a tight leash fascism and linked anti-democratic forces even in contemporary times. Russia’s invasion and continued occupation of parts of Ukraine reminds us starkly that the democracy versus fascism battle is far from over.

Right now, the US needs to remain on the side of the rest of the West very firmly, lest fascism enjoys another unfettered lease of life through the absence of countervailing and substantial military and political power.

However, by reducing its financial support for the UN and backing away from sustaining its humanitarian programs the world over the US could be laying the ground work for an aggravation of poverty in the South in particular and its accompaniments, such as, political repression, runaway social discontent and anarchy.

What should not go unnoticed by the US is the fact that peace and social stability in the South and the flourishing of the same conditions in the global North are symbiotically linked, although not so apparent at first blush. For instance, if illegal migration from the South to the US is a major problem for the US today, it is because poor countries are not receiving development assistance from the UN system to the required degree. Such deprivation on the part of the South leads to aggravating social discontent in the latter and consequences such as illegal migratory movements from South to North.

Accordingly, it will be in the North’s best interests to ensure that the South is not deprived of sustained development assistance since the latter is an essential condition for social contentment and stable governance, which factors in turn would guard against the emergence of phenomena such as illegal migration.

Meanwhile, democratic sections of the rest of the world in particular need to consider it a matter of conscience to ensure the sustenance and flourishing of the UN system. To be sure, the UN system is considerably flawed but at present it could be called the most equitable and fair among international development organizations and the most far-flung one. Without it world poverty would have proved unmanageable along with the ills that come along with it.

Dehumanizing poverty is an indictment on humanity. It stands to reason that the world community should rally round the UN and ensure its survival lest the abomination which is poverty flourishes. In this undertaking the world needs to stand united. Ambiguities on this score could be self-defeating for the world community.

For example, all groupings of countries that could demonstrate economic muscle need to figure prominently in this initiative. One such grouping is BRICS. Inasmuch as the US and the West should shrug aside Realpolitik considerations in this enterprise, the same goes for organizations such as BRICS.

The arrival at the above international consensus would be greatly facilitated by stepped up dialogue among states on the continued importance of the UN system. Fresh efforts to speed-up UN reform would prove major catalysts in bringing about these positive changes as well. Also requiring to be shunned is the blind pursuit of narrow national interests.

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Egg white scene …

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Hi! Great to be back after my Christmas break.

Thought of starting this week with egg white.

Yes, eggs are brimming with nutrients beneficial for your overall health and wellness, but did you know that eggs, especially the whites, are excellent for your complexion?

OK, if you have no idea about how to use egg whites for your face, read on.

Egg White, Lemon, Honey:

Separate the yolk from the egg white and add about a teaspoon of freshly squeezed lemon juice and about one and a half teaspoons of organic honey. Whisk all the ingredients together until they are mixed well.

Apply this mixture to your face and allow it to rest for about 15 minutes before cleansing your face with a gentle face wash.

Don’t forget to apply your favourite moisturiser, after using this face mask, to help seal in all the goodness.

Egg White, Avocado:

In a clean mixing bowl, start by mashing the avocado, until it turns into a soft, lump-free paste, and then add the whites of one egg, a teaspoon of yoghurt and mix everything together until it looks like a creamy paste.

Apply this mixture all over your face and neck area, and leave it on for about 20 to 30 minutes before washing it off with cold water and a gentle face wash.

Egg White, Cucumber, Yoghurt:

In a bowl, add one egg white, one teaspoon each of yoghurt, fresh cucumber juice and organic honey. Mix all the ingredients together until it forms a thick paste.

Apply this paste all over your face and neck area and leave it on for at least 20 minutes and then gently rinse off this face mask with lukewarm water and immediately follow it up with a gentle and nourishing moisturiser.

Egg White, Aloe Vera, Castor Oil:

To the egg white, add about a teaspoon each of aloe vera gel and castor oil and then mix all the ingredients together and apply it all over your face and neck area in a thin, even layer.

Leave it on for about 20 minutes and wash it off with a gentle face wash and some cold water. Follow it up with your favourite moisturiser.

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Features

Confusion cropping up with Ne-Yo in the spotlight

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Ne-Yo: His management should clarify the last-minute cancellation

Superlatives galore were used, especially on social media, to highlight R&B singer Ne-Yo’s trip to Sri Lanka: Global superstar Ne-Yo to perform live in Colombo this December; Ne-Yo concert puts Sri Lanka back on the global entertainment map; A global music sensation is coming to Sri Lanka … and there were lots more!

At an official press conference, held at a five-star venue, in Colombo, it was indicated that the gathering marked a defining moment for Sri Lanka’s entertainment industry as international R&B powerhouse and three-time Grammy Award winner Ne-Yo prepares to take the stage in Colombo this December.

What’s more, the occasion was graced by the presence of Sunil Kumara Gamage, Minister of Sports & Youth Affairs of Sri Lanka, and Professor Ruwan Ranasinghe, Deputy Minister of Tourism, alongside distinguished dignitaries, sponsors, and members of the media.

Shah Rukh Khan: Disappointed his fans in Sri Lanka

According to reports, the concert had received the official endorsement of the Sri Lanka Tourism Promotion Bureau, recognising it as a flagship initiative in developing the country’s concert economy by attracting fans, and media, from all over South Asia.

Nick Carter: His concert, too, was cancelled due to “Unforeseen circumstances

However, I had that strange feeling that this concert would not become a reality, keeping in mind what happened to Nick Carter’s Colombo concert – cancelled at the very last moment.

Carter issued a video message announcing he had to return to the USA due to “unforeseen circumstances” and a “family emergency”.

Though “unforeseen circumstances” was the official reason provided by Carter and the local organisers, there was speculation that low ticket sales may also have been a factor in the cancellation.

Well, “Unforeseen Circumstances” has cropped up again!

In a brief statement, via social media, the organisers of the Ne-Yo concert said the decision was taken due to “unforeseen circumstances and factors beyond their control.”

Ne-Yo, too, subsequently made an announcement, citing “Unforeseen circumstances.”

The public has a right to know what these “unforeseen circumstances” are, and who is to be blamed – the organisers or Ne-Yo!

Ne-Yo’s management certainly need to come out with the truth.

However, those who are aware of some of the happenings in the setup here put it down to poor ticket sales, mentioning that the tickets for the concert, and a meet-and-greet event, were exorbitantly high, considering that Ne-Yo is not a current mega star.

We also had a cancellation coming our way from Shah Rukh Khan, who was scheduled to visit Sri Lanka for the City of Dreams resort launch, and then this was received: “Unfortunately due to unforeseen personal reasons beyond his control, Mr. Khan is no longer able to attend.”

Referring to this kind of mess up, a leading showbiz personality said that it will only make people reluctant to buy their tickets, online.

“Tickets will go mostly at the gate and it will be very bad for the industry,” he added.

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