Must you be in business to have income?

A business leader meets his team. Having a fool at the helm of a family business puts it in great danger of sudden collapse. PHOTO | FILE 

By JOSEPH THOGO

The question whether tax should apply or not rests on these main questions; whether there is income, whether the income is sourced from Kenya, the character of the income, the applicable tax rate and most importantly when the tax is due.

While tax laws play a crucial role in providing some answers to these questions, the law does give room for answers to be determined based on a particular set of facts and circumstances.

The applicable tax rate and when the tax should be payable is often set in the relevant taxing law, but what constitutes income is more often a question of facts and circumstances.

While most jurisdictions will indicate different items that make up income for tax purposes, their tax laws will often be coy about defining income.

They opt not to define income because a definition has the potential to be restrictive and perhaps even exclude other forms of income taxation.

The current Kenya Income Tax Act has a non-exhaustive list of the different sources that give rise to income, but it presupposes that the different sources of income arise from carrying out a business.

Unfortunately, the legislation does not define what income is but defines what amounts to a business rather broadly.

Does this then mean that income tax only applies when one carries on a business? If one is not necessarily carrying on a business but has income, should he pay tax on his income?

Should income from illegal and immoral economic activities, for example, be subject to tax? If one receives an award from the courts, for example, should that amount be subject to tax?

If one is habitually buying and selling shares, would you say that they are operating a business of buying and selling shares?

How is that different from someone who buys and sells shares passively? All these would not matter but for the different ways in which they are all treated under the Income Tax Act, in terms of character and applicable tax rate.

Remember that the list of the different sources that give rise to income is not exhaustive and one could have income that is subject to tax without necessarily carrying on a business.

Well, except where the law expressly states that if tax is not imposed, income tax should be levied on all forms of gains and profits irrespective of their source.

So what is income or gain? Payments, in whatever form, are considered income where the payments are undeniably accessions to wealth, clearly realised, and over which a person has complete dominion over.

This would therefore mean that one has income where his balance sheet or financial position has been improved.