Rental Income Tax In Uganda. What Is It Exactly?

Rental Income is the total amount of rent derived by a person for the year of income from the lease of immovable property (land and or buildings) in Uganda with the deduction of any expenditure incurred in respect of the property.

The law provides under Section 5 of the Income Tax Act.

(1) Subject to and in accordance with this Act, a tax shall be charged for each year of income and is imposed on every individual who has rental income for the year of income.

(2) The tax payable by an individual under this section for a year of income is calculated by applying the relevant rates of tax determined under section 6(2) to the rental income derived by the individual for the year.

(3) The tax imposed under this section on an individual is separate from the tax imposed under section 4 and—

(a) the rental income of the individual shall not be included in the gross income of the individual for any year of income;

(b) expenditures and losses incurred by the individual in the production of the rental income shall be allowed as a deduction under this Act for any year of income; and

(c) the tax payable by a resident individual under this section shall not be reduced by any tax credits allowed to the individual under this Act.

(4) In this section, “year of income” means the period of twelve months ending on 30th June

This therefore means that the law on rental income tax dictates the amount of rent earned by persons and is segregated and taxed separately as observed in the provisions above.

What is it in Uganda?

Counsel Allan Atwiine in his article titled Understanding Rental Income Tax that featured early this week in the Daily Monitor 3rd August 2021https://www.monitor.co.ug/uganda/oped/commentary/understanding-rental-income-tax-3497156

he notes that,

"Whereas rental income tax has been legislatively provided for since July 1997, the current talk about it in the media makes it noticeable that most landlords are not cognizant of the tax obligations arising out of their ownership of rental properties.

I have heard some of them actively engaged in the debate and calling it new, unaware of the implications of their non-compliance. A Google search about this topic in Daily Monitor reveals more than five articles written about it since May 2021, although none is elaborate, which has prompted me to write this.

Rental income is the total amount derived from the lease of immovable property (land or buildings) in Uganda, with the deduction of any expenditures and losses incurred in respect of that property. Anybody who earns rental income must therefore pay tax to Uganda Revenue Authority (URA). Rental income is taxed independent of any other income of the taxpayer, and the tax returns for each property are filed separately.

A deduction of interest on the mortgage obtained to construct or acquire the premises that generate the income is allowed, plus a subtraction of expenses and losses, capped at 75 per cent of gross rental income. The tax rate is 30 per cent of chargeable income. For example, if the annual rental income is 100 million, one can deduct up to 75 million as expenses (only if justified), and pay 30 per cent of 25 million (7.5million) as tax.

However, if for instance, one can only justify a 15 per cent deduction, that is 100 million minus 15 million, and then payment of a 30 per cent on 85 million, making it 25.5 million payable as tax. Examples of expenses that may be claimed include utilities, ground rent, property tax, maintenance costs, commission to letting agents, adverts for tenants, management fees, etc. The expenses should be incurred wholly and exclusively as a result of renting out the property and should not be capital in nature.

URA has a legal arsenal at its disposal to deal with non-compliant taxable persons or entities. The subsequent two examples are just a case in point of the penalties set against a selection of offenses, which may affect a landlord: Failure to maintain and retain proper records can attract a Shs2 million fine or imprisonment for a term not exceeding six months or both (these records should be maintained for five years after the end of the tax period to which it relates); making a false or misleading statement to URA can attract a fine of Shs4 million or imprisonment not exceeding 10 years or both. These fines exclude payment of principal owed amounts and the interest accrued. If for example, a rental income tax audit is done on a taxpayer about payments done three years ago, and a tax liability of Shs10million is discovered, the defaulter would be required to pay more than Shs22million as principal, and fines. With these risks, it is ideal for property owners who are not yet under the rental income tax net to urgently review the consequences of their transactions with a mindset to ensure that their position is corrected.

The government is doing much to identify and link rental properties to their owners, estimate the income they earn and assess the payable tax. It will integrate the data with the Tax Identification Numbers (TIN) database in an attempt to gradually trace and curb non-compliance. Therefore, this is the best time for property owners to be proactive and put their rental income tax affairs in order.

The call to URA to intensify its tax education to build the knowledge level of rental property owners, in an attempt to enhance compliance cannot be overemphasized.

Mr Allan Atwiine is a lawyer. allanatwiine@gmail. com

This article was extracted from the Daily Monitor https://www.monitor.co.ug/uganda/oped/commentary/understanding-rental-income-tax-3497156