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.
Subject to section (5) of the Income Tax Act states that 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.
In a bid to increase the revenue collection from the rental industry, the Government of Uganda has made numerous amendments to the Income Tax Act. As a result, the tax levied has remained unresolved to many individuals and companies as of this writing.
This article seeks to clarify the rental tax charges applied as of today, in accordance with the most recent amendments to the Income Tax Act.
Precedent to the 2021 Income Tax Act, individuals who earned rental income were allowed a 20% deduction of expenses incurred in the generation of the rental income in order to arrive at the chargeable income. The rental tax would then be calculated by applying a 20% rate to this chargeable income. On the other hand, companies were allowed to deduct all of their expenses, and rental tax was assessed at a rate of 30% of the chargeable income. However, changes were made in 2021, where both individuals and non-individuals were allowed 75% of the expenses and losses upon verification by URA to arrive at chargeable rental income and then tax was charged at 30%.
The latest and applicable rental tax rates were effective from July 1, 2022, and are as follows;
- For individuals, a threshold of UGX 2,820,000 was established, below which tax is nil and above which tax is charged at a rate of 12%.
- Stella has a gross rental income of UGX 1,500,000 per annum and expenses of UGX 700,000.
- Since the gross rental income is below the threshold of UGX 2,820,000, Stella’s income is not subject to rental tax.
- Allan has a gross rental income of UGX 5,000,000 per annum with expenses of UGX 700,000.
- The tax charge will be calculated as; UGX (5,000,000-2,820,000) * 12% = UGX 261,600.
Note that, only an amount equal to the threshold has been allowed a deduction. The UGX 700,000 is not considered to determine what should be deducted.
- For partnerships, once the total gross rental income is established, the same procedures as in the case of an individual are followed to arrive at the tax charge, which is then allocated to partners for payment in accordance with their share percentages.
- Betty and Davis are in a partnership incurring expenses of UGX 700,000 to collect a gross rental income of UGX 5,000,000. They agreed to share profits and losses in a ratio of 2:3.
- The total tax charge will be calculated as; UGX (5,000,000-2,820,000) * 12% = UGX 261,600. The partners will share this liability in accordance with their share ratios.
- Betty’s tax liability; UGX (2/5) *261,600=UGX 104,640.
- Davis’ tax liability; UGX (3/5) *261,600=UGX 156,960.
- For companies, trustees, and retirement funds, the total gross rental income from all sources is calculated. Only up to 50% of the gross rental income may be deducted for expenses and losses incurred in producing rental income; any amount above this threshold is subject to a 30% tax charge.
- KK ltd earns UGX 5,000,000 as rental income and spends UGX 700,000 on the repair of rentals and only UGX 300,000 on fueling the director’s car.
- The company’s tax liability will be computed as;
First, get the 50% allowable deduction. = UGX 5,000,000*50%
= UGX 2,500,000.
Note that the allowable expenses of KK ltd cannot exceed UGX 2,500,000.
Tax liability will therefore be; UGX (5,000,000-700,000) *30%= UGX 1,290,000.
Note that the UGX 300,000 relating to the fuel for the director’s car is not allowed a deduction because it was not incurred to generate the rental income collected.
Further analysis of changes in the rental tax regimes is illustrated in the table below;
|Before 1/7/2021||Effective 1/7/2021||Effective 1/7/2022|
|Individuals and non-individuals had different treatment under the rental tax.||Individuals and non-individuals had the same treatment under the rental tax.||Individuals and non-individuals have different treatment under the rental tax.|
|Individuals were allowed 20% of rental income as expenses and given a threshold of UGX 2,820,000, whereas companies were allowed all expenses related to the rental income.||Allowable deductions for expenses and losses incurred in generating rental income were capped up to 75% for both individuals and non-individuals and the threshold of UGX 2,280,000 previously allowed to individuals was repealed.||Individuals and partnerships may deduct up to UGX 2,820,000 in expenses and losses related to earning rental revenue, however, companies, trustees, and retirement funds may only deduct up to 50% of their gross rental income.|
|The rate for rental income tax for individuals was 20%and 30% for non-individuals.||The rate for rental income for both individuals and non-individuals was 30%.||The tax rate for individuals and partnerships is 12%. However, partnerships transfer liability to the partners in their sharing percentages. The tax rate applicable to other non-individuals is 30%.|
By; Naturiinda Jonnah