Rental tax obligations: How compliant are you?

Though every landlord in Uganda earning rental income has an obligation to pay tax, compliance has been very low. Keen to plug this gap, the Uganda Revenue Authority (“URA”) has intensified efforts to bolster rental tax revenue collections. In 2019, the law was amended allowing the URA to raise presumptive rental tax assessments where identified landlords did not file rental tax returns or under declared their income.

The government has recently engaged Ripple Nami Inc. to develop and deploy a rental tax compliance system that will integrate data from various sources including utility payments to help track rental properties and accruing income that landlords may be concealing. The URA is also compelling taxpayers to revise their prior year tax returns with full details of their rental expenses and landlords so that they can be followed up.

Non-compliance

It is apparent that non-compliance will be very costly going forward. Landlords should now pay attention to the arising rental tax issues including exploring ways of legitimate planning as a means of mitigating their rental tax bill.

Tax consequences

From the very outset, anyone considering investment in the real estate sector should determine whether to trade as an individual or through a company considering the differences in the tax consequences. Though rental income earned by individuals is subject to tax at a lower rate of 20 per cent, there are restrictions on expenses that a taxpayer can deduct in arriving at the income subject to tax. Trading as an individual exposes one to the possibility of paying tax even if their rental business is making losses in the period.

Company rental income tax

On the other hand, rental income earned by a company is subject to tax at a higher rate of 30 per cent. Majority of the costs incurred by the company in generating the rental income are, however, deductible which is not the case with an individual. This, therefore, means that a company making losses is unlikely to find itself in a tax paying position as is the case with the individual because of the restricted deduction of expenses for tax purposes.  

The 2020 Income Tax Amendment Bill had proposed to subject both individuals and companies to rental tax at the rate of 30 per cent but cap the deduction of expenses to 50 per cent of the revenues earned. This proposal was opposed by Parliament because it denied taxpayers the deduction of legitimate capital and operational expenses incurred on deriving rental income.

Every person or company engaged in business must register for tax and obtain a tax identification number (“TIN”). Taxpayers can be penalised if forced by the URA to register.

Landlords must register

Landlords must therefore ensure that they are registered for tax. Having a TIN enables a taxpayer to file both provisional and final income tax returns as the law requires. Failing to file tax returns crystallises penalties and interest.

The government is also encouraged to introduce fair tax policies, otherwise tax payers would be reluctant to comply with tax measures that are perceived to be unfair.

The government had for instance proposed in the 2020 tax amendments that taxpayers with more than one building would account for income and expenses as well as pay rental tax for each of the buildings separately.

This ring-fencing proposal that was declined to be passed by Parliament was unfair as it ignored the fact that some rental businesses have more than one building whose expenses and revenues are collectively aggregated in arriving at the financial performance of the business for the year.

Landlords with prior year rental tax exposure should take advantage of the ongoing voluntary disclosure programme by the URA.

This programme provides an opportunity for taxpayers to voluntarily disclose outstanding tax obligations including payment of the arising principal taxes in exchange for a waiver of interest and penalties accruing thereto.

Law

Rental tax

You must determine whether to trade as an individual or through a company considering the differences in the tax consequences. Though rental income earned by individuals is subject to tax at a lower rate of 20 per cent, there are restrictions on expenses a taxpayer can deduct in arriving at the income subject to tax. Trading as an individual exposes you to paying tax even if their rental business is making losses in the period.

The author is the managing partner, Cristal Advocates.

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