KAMPALA — Section 5 of the Income Tax Act has been amended to include a new subsection 2a. This new subsection provides that:
“A person who during a year of income earns rental income from more than one building shall account for the income and expenditure of each building separately and shall pay tax for each building separately.”
A second amendment concerning rental income is in line with the amendment of section 22 of the Income Tax Act:
“In the case of rental income, seventy-five per cent (75%) of the rental income is deductible as expenditure and losses incurred by a person in the production of such income.”
This applies to both individuals and companies. The previous rate was 20% of the rental income for individuals and 100% of all losses and expenditures incurred by the company in the generation of rental income in a year of income.
Thirdly, there is an increase in the rental tax rate as per the amendment in Part VI of the Third Schedule. The applicable tax rate is 30% of the chargeable income of a person. The previous rate was 20% for individuals and 30% for non-individuals.
To those of us who own rental facilities, and you have been complying, and also intend to continue complying, the above changes yet to be implemented effectively 01st July 2021, indicate that as an individual, you have a tax advantage of approximately 57% compared to the previous one, and for the company especially if you are still incurring significant expenditures above 75% of the total rental income, you are yet to incur more tax liability as illustrated below (i.e. Suppose your annual rental income is UGX 100m, qualifying rental expenditures are UGX 80m; this would result in chargeable rental income of UGX 20m & tax liability would be UGX 6m only, for a company.
Currently, the same rental income is expected to result in a tax liability of UGX 7.5m since the qualifying expenditure has been predetermined at 75% of the rental income thus, increasing the chargeable rental income more by 5m. For an Individual; using the same illustration: with the tax reform, the tax liability would be UGX 6.654m, and for the old setting yet to expire on 30th June 2021, you were expected to incur a tax liability of UGX 15.436m).
Lastly, it is imperative to further appreciate that, the deduction for the depreciation of an industrial building that qualifies for initial allowance has been deferred to the next year of income. Hence, in the year of investment, you can only claim an initial allowance, and from Year 2, you will be eligible for an industrial building allowance.
This makes a lot of sense to investors that have been targeting industrial building statutory purposes (i.e. an industrial building put to use for; an approved commercial building, an approved hospital, an approved hotel business, mining operations, and manufacturing operations) to ensure short and long term tax optimization.
In summary, for as long as you invest in real estate business, whether you earn a profit or incur a loss, you will have to pay tax if you are managing as a company i.e. for a non-individual; at least 30% of the 25% of the annual rental income.
Please be advised to plan accordingly for the Financial Year yet to begin 1 July 2021.
CPA David Kiwanuka
Email: firstname.lastname@example.org | (256) 773461710
ICPAU Young Accountant of the Year 2019/2021