Landlords, grasp new rental tax logic

The government on June 5 contracted an American-based company, RippleNami Inc., to provide a solution to the low collections realised from rental tax. This has received mixed reactions by the public, with some wondering whether the hiring of this firm is not making a U-turn on the BUBU (Buy Uganda Build Uganda) concept.
A quick search about RippleNami shows that it operates as a technology development company, which deploys blockchain-based solutions that enables emerging economies to generate, process, manage, and share transaction information.

It integrates millions of data points from numerous sources, offering a complete picture of timely, relevant information, to connect people, organisations and governments to enable them make better and faster critical decisions.

RippleNami is expected to commence work on July 1. They will identify properties and assign them geo-addresses in accordance with internationally accepted standards, link the identified properties to persons who earn income from those properties and cross-match the identified properties and their ownership with the URA TIN database.

The company will also determine whether a property is owner-occupied or rented out, determine the occupancy period, providing for current and previous periods, determine the estimated rental income assessable to rental tax to be paid prior to standard deductions from each property and by each property owner and provide a clear address for each property identified.

With such interventions, URA will be able to trace all property owners and all information related to the property, and tag the information to a particular taxpayer. This means that it is time for all property owners in the business of leasing/renting out their property to look into their declarations.

In addition, URA will also easily track and assess capital gains tax arising from sale of properties. Property owners who have not been on the tax radar need to consider the tax consequences of their transactions to ensure compliance and avoid penalties.

For the benefit of property owners yet to comply with their tax obligations, let me summarise how rental income tax is applied. Rental income tax is imposed on any person who derives income from renting out residential or commercial property and such a person is required to submit annual tax returns to URA.

This income is segregated from other kinds of income and is taxed separately. While companies, retirement funds, trusts and the like are taxed at a rate of 30 per cent, individuals are taxed at a rate of 20 percent after deducting 20 per cent of the gross rental income and any interest on a mortgage from a financial institution to construct or purchase the property. Individuals also enjoy a tax-free threshold of Shs2,820,000.

It is, therefore, not clear how RippleNami will determine the rent payable by a tenant of every property and this poses a risk for over or under assessment of taxes. Property owners need to ensure proper record keeping in this regard going forward and close any record gaps for the prior periods, if any.

We are also not clear on whether this new system will apply both retrospectively and prospectively, but in the event that it does, URA is likely to assess principal tax and late payment penalties for past periods. Whereas it is important that every landlord pays their tax, implementation of the new measure needs to be done in a way that is not blind to the impact Covid-19 has had on landlords.

As we embrace these changes, let’s remember that tax compliance is increasingly going to be cheaper than non-compliance. Putting our tax affairs in order is the way to go.

Ms Florence Kabagumya is a lawyer/advocate and tax adviser with BDO East Africa.