Uganda, Kampala | Real Muloodi News | In the last few weeks, there has been an uproar concerning Uganda’s real estate tax policy. Much of the outrage is centred around the 10 per cent increase in rental income tax for individuals, that came into effect July 1st. However, this outrage is misplaced.
Along with the increase in the income tax rate, the government also increased the deductible/allowable expenses from 20% to 75%. After factoring in the deductions, you are left with a 7.5% effective tax rate. For individual landlords, the new legislation actually provides a tax advantage of approximately 57% compared to the previous tax year.
The Uganda Revenue Authority (URA) has a mandate to demystify tax policy and ensure tax education to prevent unnecessary confusion. In an example of this, Mr John R Musinguzi, Commissioner General of the URA, recently responded to an article by Mr Andrew Mwenda, to clarify some of the tax policies regarding real estate. Mr Mwenda had written about a man who demolished a house, so he could sell the empty land to avoid paying Value Added Tax (VAT) or Capital Gains Tax (CGT). However, Mr Musinguzi clarified that “There is no VAT charged on the sale of residential properties.”
The man who demolished his house is an illustration of people’s misconceptions about real estate tax policy. It is fundamental for any real-estate investor to be correctly informed about the taxes that apply to them, and how to factor and plan for them accordingly. Not only that, it is important to understand the broader economic implication of how tax policy actually benefits the industry.
According to Allan Atwiine, a lawyer and business revenue growth consultant, Capital Gains Tax is one levy a real estate investor is likely to incur when they sell their property. Capital Gains Tax is the tax on the growth in value of an investment, which is realised when the owner sells an asset. Unfortunately, many people only become aware of the tax after they have sold their property.
While no one likes paying taxes, there are positive benefits that taxes like Capital Gains Tax has on the real estate industry. Mr Allan Atwiine writes that “in the absence of CGT, a lot of investment in real estate becomes speculative, and may create a bubble and turbulence in the market. CGT tax therefore plays a role in curbing this speculation, as well as propelling the market into self-correction and efficiency.”
Another justification for CGT is the increment of value on the property that results from public social-economic factors like road infrastructure. Increases in land value that arise from projects created by the community, warrants taxation for the benefit of the said community. The taxation then funds further investment in infrastructure, which ultimately results in further gains in the value of property assets.
As capital gains are only taxed when an appreciated asset is sold, those who realise capital gains already enjoy a significant tax concession in terms of tax deferral. On top of that, investors can actually reduce their Capital Gains Tax liability by adding the cost of improvements made to a property to the cost base. Further, the amount of withholding tax already remitted can also reduce one’s Capital Gains Tax liability.
On the other hand, one can claim that this tax may prevent investment in real estate, but Mr Atwiine explains that this would hold true for all other components of income tax if this were the case. Equally important, Capital Gains Tax is not levied on a primary residence.
The real estate market is generally strong when the economy is strong; likewise, if the overall economy is suffering, real estate economics are also likely to slow.
Currently, the Government of Uganda faces challenges of balancing the budget, which is currently in a massive deficit. Uganda’s debt has now surpassed the 50% threshold of gross domestic product (GDP). Further, Ministry of Finance expects public debt to GDP to rise to 51.9 per cent in the 2021/22 financial year.
Capital Gains Tax is necessary to contribute to domestic revenue to service Uganda’s debt and expenditure. Further, Mr Atwiine argues it is a fundamentally fair, equitable, and progressive tax, as it is generally levied upon high net-worth individuals. It would be profoundly unfair to give preferential tax treatment to people earning capital income, while wages and corporate income earners carry Uganda’s tax burden.
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URA Commissioner General Makes Clarifications on Rental Income Tax
Real Estate Business: Changes to the Income Tax Act FY 2021/2022
