Rental levy is key for the tax policy makers

Rental tax is a unique form of property income because of its unique taxation, as other forms of property income are largely taxed through withholding tax. Investment in real property remains popular among many business people as well as those involved in gainful employment. This is because it is a good form of passive income, with many people being attracted to it for the main reason that, you do not have to be there all the time to supervise the project/or business.

In the past, the administrators have found it very difficult to bring to the tax net persons earning rental income. This is because many of them remain very elusive and hard to trace and follow up. 
In the tax amendments of FY 2019,  government announced the engagement of the American Company, Ripple Nami Inc, to assist with mapping and identifying rental taxpayers in the Greater Kampala Area. Also, with the continued focus of amending rental income taxation for now three consecutive years makes rental tax a key focus area as a potential source of increasing government revenue. 

Among the proposed amendments to the Income Tax Act is a proposal to increase the rental tax rate for individuals currently at 20 per cent to 30 per cent. Additionally, there is a proposal to cap the allowable deduction for companies as well as individuals with rental income at 60 per cent of the gross rental income.  The 2021 Income Tax Amendment Bill further, proposes separate accounting for rental tax for each property. Noteworthy is that rental income for both companies and individuals is assessed separately and as such, not grossed up with other income.

 This, therefore, creates a further isolation intended to collect in as far as possible from each rented building in the country. If the Amendment Bill is passed with the current proposals, rental taxpayers who are in loss positions in one property will not be able to net the loss off any other taxable rental income of another property. 
Secondly, separate tax reporting for rental income as well as separate tax filings for each property makes it very expensive for the taxpayer in terms of tax compliance with regard to filing and payment of rental tax. 

A taxpayer will not be able to offset a tax loss from one property to another and yet it is the same taxable person. All these will drive tax costs high for rental income and is likely to discourage investment into this sector. With regard to individual property owners, whereas currently earnings of rental income are taxed at 20 per cent, this came with an allowable deduction of 20 per cent of gross rental income. This appears to create a better deal for individuals as it is likely to reduce the effective rate in comparative terms notwithstanding the separate reporting that comes for each property.

Similarly, fixing the allowable deduction at 60 per cent of gross rental income for companies makes it appear to be a great incentive from government as it appears to lower the effective rental tax rate. This will only last to the extent that there are no tax losses that will be lost as a result of the separate taxation.  

Non-deductibility of tax losses/actual expenses will make it difficult to the payer as tax will be paid based on turnover. This tax proposal is against the matching concept/equity in taxation which provides for a deduction in respect to expenses/losses incurred in generating income included in gross income. The proposal, if passed into law, will work to ensure that a taxpayer with several rental properties does not offset tax losses and credits in one building against other buildings’ liabilities but file tax returns equal to the number of properties. 

The proposal will further increase the administrative responsibilities of the taxpayer with regard to rental tax filings and tax payment. However, it may reduce the effective tax rate for some taxpayers by creating tax savings.

Ms Sarah Muzungyo Chelangat is an associate director, Tax at Ernst and Young Uganda.  [email protected]