UGANDA, Kampala | Real Muloodi News | New tax legislation came into effect on July 1st that impacts landlords. There has been misinformation on different media outlets about the changes tax under the new law. Therefore, it is understandable if you are confused about what the changes are, and how it is going to affect your rental business. Well, let’s dive in and get the facts.
There are two significant changes to rental income tax, in the Second Amendment of Section 22 of the Income Tax Act of Uganda:
- This new amendment, that applies to both individuals and companies, reads: “In the case of rental income, seventy-five per cent (75%) of the rental income is deductible as expenditure and losses incurred by a person in the production of such income.” Previously, individuals could only claim 20% of expenses against rental income earned, whereas for non-individuals (companies), there was no cap.
- There is an increase in the rental tax rate for individuals. The new tax rate is 30% of the chargeable rental income of a person. This rate was formerly 20%. This brings the rate in-line with non-individuals (companies) which also pay 30%.
There are arguments for and against these changes. On the affirmative side, the government must increase its domestic revenue. Uganda’s debt levels, which have now surpassed the 50% threshold of gross domestic product (GDP), are expected to reach 51.9 per cent in the 2021/22 financial year. Government must increase domestic revenue to stabilise the economy; increasing tax revenue is a necessary component of this.
The other affirmative argument is that while the tax rate on rental income for individual landlords has increased by 10%, the new tax policy actually reduces the over-all tax burden for individual landlords. Because these landlords can now claim 75% of expenses against rental income instead of 20%, their effective tax rate has been reduced to 7.5%, where previously, it was 16.5% after deductions.
Those who oppose Uganda’s real estate tax policies, say the industry is over-taxed. An opinion piece titled “Anatomy of Policy Disaster”, authored by Andrew Mwenda, is one such opposing article. While Mr Mwenda acknowledges the poor performance of the economy and the government’s need for taxes to raise revenue, he alleges Uganda’s tax policy on real estate is stifling the once thriving sector.
This article will further explore the points made by Mr Mwenda, and as well as clarifications made by Mr John Rujoki Musinguzi, the Commissioner-General of the Uganda Revenue Authority (URA), who authored the article “Clarification on taxation of real estate.”
In Mr Mwenda’s article, he claimed: “A friend was selling a house on a 60-decimals plot of land in Bugolobi. The price was $500,000 (USh 1.8 billion). He had been renting it and paying rental income tax to URA. Here are the taxes he would pay if he sold the house. First would be 18 percent VAT i.e. USh 275 million. He had bought the house in 1997 at USh 300 million. Therefore, he had to pay capital gains tax of USh 450 million. The buyer would have to deduct 6 percent as withholding tax i.e. USh 108 million. The total tax liability would come to USh 833 million.”
Mr Mwenda said the friend later demolished his house and sold the plot as empty land to avoid paying all these taxes.
Rebutting to that, Mr Musinguzi clarified that:
- There is no Value Added Tax (VAT) on the sale of residential properties.
- VAT is only chargeable to a person who is registered for VAT and making taxable supplies.
- Mr Mwenda assumed that the withholding tax is a final tax and separate from capital gains.
- Mr Mwenda’s friend could actually reduce his capital gains tax liability by the amount of withholding tax already remitted.
- Capital gains due would be: USh 450 million, minus USh 108 million, equals USh 342 million.
- The cost base on which to calculate capital gains was not considered.
- Improvements made to the house should be added to the cost base. For example, if improvements made to the home were worth USh 200 million, the capital gain liability is then USh 390 million, minus USh 108 million, which equals USh 282 million, which is much lower than the USh 833 million that Mr Mwenda calculated, according to Mr Musinguzi.
- The assumption that tax planning does not have any advantage is also wrong, as destroying structures does not change the tax liability, and it comes with a cost.
Andrew Mwenda’s second example; “Imagine a Ugandan who has made USh 400 million and decides to purchase an apartment in Bugolobi to earn some income. Let us assume that he registers with URA for rental tax and that three years later, he had a tenant for only four months, but the price of his apartment has appreciated to USh 600 million, giving him or her capital gain of USh 200 million. If he sold the apartment, he would have to pay VAT of USh 92 million, USh 60 million as capital gains, and the buyer would have to withhold USh 36 million as withholding tax, a total of USh 188 million. Three years later he would have gained only USh 12 million from the investment. But this is before we deduct the cost of inflation. His net return is most likely close to zero.”
Mr Musinguizi also clarified the above example from Mr Mwenda’s article that “unless the apartment described above is a service apartment, there will be no VAT charged.”
Since the withholding tax is an upfront payment of the capital gains tax, after calculating the offset of withholding tax of USh 36 million, the ultimate tax burden would be USh 24 million, not USh 188 million as Mwenda claims, according to Mr Musinguzi.
That is, if the apartment had not been improved in the three years, had it been, it would have reduced the capital gains liability even further.
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