Ms Patricia Kiggundu, a tax manager at PwC, shares insights on how potential investors may be discouraged from entering the rental market due to the Income Tax Act.
What are the key changes to rental income taxation that took effect on July 1, 2022?
Many people view rentals as a way to secure a fallback position through their savings.
However, it is crucial to understand the realities of taxation in this area. When deciding to invest in rentals, individuals should be aware of their tax obligations.
Many people wake up one day and decide they want to create a new source of income, whether it is building a family home or investing in rental units like small apartments or studio rooms.
If you rent out properties or land, or if someone occupies your buildings, you are generating rental income. The tax authorities expect that this income will be taxed.
The government identified a challenge in collecting sufficient tax revenue, especially from individuals and corporate landlords.
As of July 1, 2022, the government wanted to simplify the tax regime for individuals involved in rental activities.
One of the most significant changes is the removal of the previous 75 percent deduction of rental income for computing chargeable tax for both individuals and corporate landlords. Now, you cannot claim any expenses related to your rental properties if they exceed Shs2.8 million. If your annual rental income is Shs2.8 million shillings or less, you are not required to pay any tax.
However, if your rental income exceeds this threshold, you will be taxed, with only a flat deduction of Shs2.8 million allowed, regardless of your actual expenses.
Understanding these changes is crucial for complying with tax regulations and optimising your rental investment.
What does ‘gross’ refer to in this context?
In this context, ‘gross’ refers to the total annual rental income before any expenses or deductions are taken into account. It represents the full amount of money collected from rent, allowing municipalities to determine property rates based on this figure.
If an individual is running apartments and earning income from them, the new law states that you cannot claim any expenses or losses associated with those apartments if they exceed Shs2.8 million. For clarification, this means: If you earn an annual rental income of Shs2.8 million or less, you are not obligated to pay any tax on that income. However, if your rental income exceeds Shs2.8 million, you will be subject to taxation.
Who collects property rates?
Property rates are collected by local authorities, such as the Kampala Capital City Authority (KCCA) in Kampala. Property owners need to account for these rates alongside other taxes, such as a 12 percent tax on rental income.
Can property rates be deducted as an expense for tax purposes?
Currently, individual landlords are not allowed to deduct property rates as an expense when calculating their rental income tax, even though these rates are legitimate business costs. This is a significant issue for landlords, as it increases their overall financial burden.
How does the tax treatment differ for corporate landlords?
A corporate landlord is someone who operates rental properties through a registered company. Corporate landlords operate rental properties through a registered company and are subject to different tax rules.
Unlike individual landlords, corporate landlords face limitations on deducting expenses to prevent over-claiming. The government felt they were not getting enough from corporate landlords.
As of July 1, 2022, laws cap the deductible expenses for corporations at 50 percent of their gross rental income. But the expenses and losses you can claim are capped at 50 percent of their gross rent. This means if a corporate landlord earns Shs200 million in rent and incurs Shs125 million in expenses, it can only deduct Shs100 million for tax.
Currently, the law caps deductible expenses for corporations at 50 percent of their gross rental income, limiting their ability to claim expenses for tax purposes compared to individual landlords.
How do these tax policies affect the rental market and living costs?
The high tax rates and limitations on expense deductions create a challenging environment for landlords. Increased operational costs are often passed on to tenants, leading to higher rents and escalating living costs. This can make housing less affordable and perplexing, as it deters investment in maintaining and improving rental properties.
What has the government proposed to improve the tax environment for landlords?
During discussions for the FY 2025-2026 budget, the government indicated that it aims to create a tax environment that is predictable, voluntary, and fair.
However, we are yet to see whether these intentions will translate into tangible changes to the rental tax laws that could alleviate the financial strain on landlords and tenants alike.
What are the implications for future investment in rental properties if current tax laws remain unchanged?
If the tax laws remain unchanged, potential investors may be discouraged from entering the rental market due to the unfavourable tax structure. This can lead to a stagnant rental market, further straining the availability and affordability of housing.
The government’s aim to position Uganda as a tourist hub relies on having an attractive infrastructure and housing market, which may be jeopardised by restrictive taxation.
What challenges are landlords facing, particularly in urban areas and how can landlords advocate for their interests to the government?
Landlords in urban areas especially those with properties in malls and commercial spaces, are facing significant challenges. Many tenants are struggling to afford the rent, leading to calls for waivers.
However, landlords also have their financial obligations, such as paying interest to banks, creating a difficult balance between collecting rent and supporting tenants.