In May 2018, the Uganda Revenue Authority (URA) embarked on a nationwide campaign to register all landlords in a bid to enforce tax compliance. This was preceded by a public notice to this effect. As per the recent Budget projections, the URA expects to collect rental tax of over Ushs 120 billion in FY 2018/19, Ushs 137 billion in FY 2019/20, and Ushs 160 billion in FY 2020/21, representing a significant increase from the Ushs 72 billion collected in FY 2016/17.
Various media reports indicate that a number of us, landlords and tenants alike, are not happy with the URA’s initiative to register landlords with some people citing gaps in government’s service delivery as a justification for not paying the tax. With the number of recent contentious changes to the tax laws (e.g. excise duty on mobile money, VAT withholding tax of 100%), there is some confusion as to whether the move to register landlords is a bid to introduce a new form of taxation.
The truth is that the rental tax is not a new tax. It has been in the tax law for a long time and depending on how much rental income one earns, that income was always required to be subject to tax under the Income Tax Act, Cap 340.
For individuals, any rental income is separated from other income the individual earns. This means that if you are an employee of XYZ Limited earning a monthly salary, but also own a muzigo (“a rental” as we normally call them) on the side from which you get extra income, while XYZ Limited withholds tax on your salary, you are also required to file a tax return declaring your rental income. An individual who earns rental income is allowed to deduct 20% of the rental income as deemed expenses incurred. The balance is then subject to an income tax at 20% to the extent the balance exceeds Ushs 2,820,000 per year (or Ushs 235,000 per month).
For companies, up to 30 June 2014, rental income was combined with any other income and after claiming total allowed expenses, tax at 30% was imposed on the combined net profit. No tax was due if the company was in a tax loss position. From 1 July 2014 however, the law was amended to require companies to separate rental income from all other income. This now matches the treatment applied to individuals.
For corporates, there is no limit on the expenses they can claim against the rental income. However, any net profit after deducting allowed expenses is subject to tax at a rate of 30%.
Effective 1 July 2018, the tax law has been amended to allow individuals to also claim a deduction for interest paid on a bank mortgage used to acquire the property. This is a good thing.
So after knowing all this, what is the problem? Is it fair for URA to require all landlords to register?
Before we answer this question, let us look at the housing statistics in Uganda as published by the Uganda Bureau of Statistics (UBOS).
As per the 2014 population census results, 4 years ago our population stood at 34.6 million. Wakiso and Kampala district were the most densely populated districts with about 1.9 million and 1.5 million people respectively.
As per the most recent UBOS household survey report, in FY 2016/17, 83% of Ugandans in rural areas own the houses in which they stay, while 11% rent from other people. Compare this to the urban areas where 44% of Ugandans own their accommodation and 48% rent.
Further, the UBOS report indicates that in Kampala alone, about 71% of people rent their accommodation.
So what does this tell us?
In simple terms, it means that out of every 10 people in Kampala, about 7 of them are paying rent to a landlord.
Are these landlords all registered and paying tax on the income you pay them as rent? Do they issue rental agreements? Do they issue receipts for the rental income they earn?
Why don’t we now take a look at what URA is saying.
According to the East African Revenue Comparison analysis report, in 2015/16 URA’s domestic tax revenue performance improved significantly and this commendable performance was mainly attributed to sensitisation conducted in the area of rental income and effective monitoring leading to registration of taxpayers. And according to the URA’s report on Revenue Collections, in 2017 the URA generated a surplus revenue of UShs 530 million which was as a result of creating the rental unit department which was tasked with carrying out vigorous door to door sensitisation and enforcement of taxpayers who were not compliant.
According to the recent Budget Speech, over the last two years to FY 2017/18, URA’s revenue collection from rental income grew by 140% from Ushs 55 billion in FY 2015/2016 to Ushs 117 billion in FY 2017/18.
As you can see from the brief statistics above, there is little doubt that the URA’s strategy to require all landlords to register is likely to reap significant revenue returns.
So, is URA’s drive to register all landlords fair?
Let us take a simple example of Luke, a tenant, and Musa, a landlord in Kyanja.
Luke is employed with ABC Limited and earns a gross monthly salary of Ushs 1 million. After his employer deducts PAYE of Ushs 202,000, NSSF of Ushs 50,000, and Local Service Tax of 25,000, Luke receives a net salary of Ushs 723,000.
Luke stays in a one bedroom house in Kyanja and pays his landlord Musa, Ushs 250,000 as monthly rent.
Musa acquired land in Kyanja a few years ago and just recently built 5 rentals at a total cost of UShs 80 million (without borrowing). He stays in one unit and rents out the other four units for Ushs 250,000 per month each. In total, he receives Ushs 1 million per month from his rentals.
As per the current tax law, in each month, Musa is entitled to deduct Ushs 200,000 as deemed expenses (i.e. 20% of the gross rent) and will pay tax of 20% on the balance exceeding Ushs 235,000. After paying taxes of Ushs 113,000, Musa has monthly net income of Ushs 887,000 (before actual expenses).
Now let us compare Musa and Luke. Both of them earn Ushs 1 million every month but after paying taxes, who has more income to enjoy life with?
What if Musa is not registered for tax as a landlord and did not pay the tax he was required to pay. This would put him in an even better position compared to his tenant. But, as we all should know, there are penalties, including fines and imprisonment, for failure to comply with one’s tax obligations.
What about the Ushs 80 million that Musa invested to buy the land and build his rentals and other actual expenses incurred? If he can only claim 20% of his rental income as deductible expenses, there may be a restriction on his ability to fully recover his investment in a tax efficient manner.
What if Musa owned the rentals through a company he set up? In that case, he would be allowed to claim a deduction for the actual rental expenses incurred and pay tax at 30% on the net profit.
As I conclude, I repeat the initial question. Is URA’s effort to register landlords and collect rental tax fair or foul? On the basis that every person in Uganda should bear their fair share of the tax burden (representing the cost of running government functions and providing services) then the conclusion may be clear.
By Sophie M. Kayemba
Manager Tax services at PwC Uganda
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