UGANDA, Kampala | Real Muloodi News | The Parliamentary Committee on Finance, Planning and Economic Development has commenced debate on the new tax bills for the Financial Year 2022/23.
The new tax bills propose changes to Ugandan tax laws that impact property owners, developers and landlords. These include the Income Tax Act and the Tax Procedure Code Act, among other tax bills.
Taxes Impacting Land Transactions
The proposed changes include a clarification of Section 118B of the Income Tax Act, which relates to withholding of tax by the purchaser of a business asset; in this case land.
Withholding tax (WHT) is a form of income tax that is withheld by a person making payments to another person. The person making the payment deducts the WHT from the amount being paid and is required to remit the amount to the URA.
A resident person who purchases a business asset is under an obligation to withhold tax at the rate of 6 per cent of the gross payment.
This new amendment proposes to clarify “business asset” to mean land which is used or held for use in any business (whether whole or in part). This includes land that is used in business to generate income, and land owned by a company, trust or partnership.
This is not a new tax. Any person selling land, a house or any piece of property purchased exclusively or primarily for business use was already subject to the tax. However, the proposed amendment attempts to define ‘business asset’ as a particular set of land.
Therefore, should one purchase land from a business, company, partnership or trust, one is required to withhold tax on the gross payment paid for the land. The withholding tax is charged at a rate of 6 per cent and it should be withheld at the point of making the payment, whether cash or in-kind for the land.
Upon withholding the tax, the purchaser of the land must file a withholding tax return indicating the details of the seller, the gross amount paid for the land, the date of payment, the nature of payment, and the amount withheld.
This return must be filed by the fifteenth day of the month following the purchase. Should the purchaser fail to file the return by the due date, he or she is liable to pay a penalty for late filing.
Buyers of land should pay particular attention to this clause, as a purchaser of land who fails to withhold tax will be held personally liable to pay the amount of tax which has not been withheld and/or remitted to URA.
However, under the new law, the WHT clause will not apply to land belonging to an individual that is subject to rental tax, or land held as trading stock.
Equally, the tax shall not apply to a seller where the Uganda Revenue Authority Commissioner is satisfied that the seller has regularly complied with their tax obligations.
The proposed law also excludes WHT from situations where the disposal of a property is by means of gift, bequest, devise or inheritance that does not generate again included in the business, employment or property income.
Lawmakers on the Finance Committee as well as policy analysts reason that the proposed tax may affect property developer businesses, and land agents who buy land for purposes of resale, among other groups of people.
Former Kabarole MP Sylvia Rwabwogo explains that in the proposed amendment, the government seeks to tax land transactions where someone is a property dealer or developer, as well as individual land agents who buy land for purposes of resale.
“The seller under this [proposed] law incurs a tax cost because it is property sold for business and not home ownership…if I sell my house to another person in order for me to relocate, then, I don’t incur that cost,” Ms Rwabwogo explains.
Taxes Impacting Rental Income
Another proposed change to the Income Tax Act affects landlords. Lawmakers are proposing a reduction in the rate of rental tax for individuals from 30% on chargeable income to 12% on gross rental income.
Deductible expenses and losses allowable to taxpayers earning rental income shall be capped to 50% of their rental income in that year of income. Currently, they stand at 75%. Any excess shall be carried forward to the subsequent year.
Lawmakers are also proposing a repeal of the deduction of interest expense incurred on a mortgage from financial institutions and applied towards the acquisition or construction of premises from which rental income was generated. This is currently an allowable deduction for individuals.
However, tax consultants have cautioned Parliament on the negative implications of the proposed rental income tax amendments.
Joseph Okuja from Libra Advocates and Consultants at a meeting with the Committee of Finance on Thursday, 05 May said that the amendment does away with a threshold on the rental income tax, putting small and big landlords at the same level of taxation.
“Before, the law exempted those earning less than Shs2.8 million annually before last year from rent which established the aforementioned figure as the threshold for rental income tax,” he explains.
Changes to the Tax Procedures Code that Impact Landlords
Electronic Invoicing of Tenants
Landlords and property managers who earn more than USh150 million must implement the electronic invoicing system EFRIS when invoicing their tenants or customers.
Under the proposed changes to the Tax Procedures Code Act, landlords and property managers that do not comply with the requirements of electronic receipting and invoicing face a temporary closure of business.
The proposed changes also introduce penalties for offences relating to misuse of the electronic receipting and invoicing system.
A Reward for Informers of Landlords Cheating the System
The proposed changes to the law also introduce rewards to informers whose information leads to the collection or recovery of tax.
The commissioner shall pay a person who provides information leading to the identification of unassessed tax 1% of the tax or USh15 million, whichever is less.
If the law passes, landlords who are avoiding paying rental income tax will need to be wary of disgruntled tenants who could profit from reporting on their landlord’s tax avoidance.
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