Business assets are restricted to where an asset is used in a business, or where the asset is held ready for use in a business and any asset held for sale in a business.
Before the proposed amendment, the sellers or persons in real estate would pay the following taxes;
- Currently, there is a withdrawing tax levied on the disposal of business assets that form part of business income to a tune of 6%.
- Rental Income Tax that is paid off the rental income earned by property owners. This would be 20% of the gross rental income.
- Upon disposal of the land or asset by the owners, entitled to payment of capital gains tax.
- Stamps Duty is a tax paid on the legal instruments including sale agreements, mortgage deeds, and lease and conveyance tenancy agreements.
Proposed tax amendment
The amendment inserts Section 5A in the Income Tax which intends to charge 5% tax on the profit made from the voluntary disposal of a non-business asset.
Non-business assets mean all assets owned by an individual or a company or its subsidiaries whether currently or in the past that does not relate to a business asset. The intended non-business assets include land held in cities and municipalities except that land held for commercial business and shares in a private limited company.
An illustration would be if a company is in the business of real estate say, buying and selling of land, it is not going to pay this tax since the land is a business asset to the company. However, if an individual conducts a one-off sale of their property which was never a business asset that could attract the 5% off the disposal because that property was a non-business asset.
However, the gains from the disposal of a non-business asset will not be taxed if they are derived from;
- The involuntary sale of a non-business asset through auction, court order, mortgages, divorce settlement or separation agreement.
- Disposal of urban and municipal land is considered as an individual’s main residence.
- The disposal of an investment stake held by a registered venture capital fund or private equity firm.
- Transmission of a non-business asset owned by a deceased person to a trustee or beneficiary.
- Rental property is subjected to rental income.
What is the effect of the Imposition of Section 5A of the Income Tax Act?
Increment in the general prices of properties. It must be noted that land among other non-business assets is valuable. Before the amendment, acquisition of land was costly and now with the amendment, it calls to about doubling of the prices to meet the tax obligations. This will not only affect the land in the cities and municipalities but also other jurisdictions.
Increase in the incidental costs of rent and construction either directly or indirectly. Directly, increased tax can raise the expenses for property owners and developers potentially leading to higher rents and construction costs. Indirectly, changes in taxes can influence market dynamics, investor behavior and overall economic conditions which in turn can affect rental rates and construction costs.
Who bears the tax burden?
This means that the buyer will withhold 5% off the gross amount to be paid to the seller and remit it to URA. Thus the tax burden is on the seller. However, the seller will shift the burden to the buyer through increasing the market price. For example, X Estates comes to Y to buy land in Kira. Y will charge 800Million and Factor in 5% to indicate 800 Million + 5%.
What are the criticisms of the amendment?
This amendment seeks to impose a tax on the disposal of non-business assets in cities and municipalities. This creates a discrimination in the law with disposes of the same non-business assets that can occur in other jurisdiction and yet the cardinal canon of tax is to incorporate principles such as equal treatment, fairness and impartiality and leave no room for discrimination.
Additionally, there is likely to be a conflict with Section 21(1) (k) of the Income Tax Act that envisages an exemption of any capital gains that is not included in business income to encompass the gains from disposal of non-business assets. Critically, this would mean that just imposition of Section 5A as per the amendment leaves a gap in Section 21(1) (k) that would necessitate an amendment to widely cover the disposal of a non- business asset.
Conclusively, it is imperative to note that the proposed amendment of the 5% is on the disposal of non-business assets and failure to comply attracts a tax penalty, which is bound to hinder the transfer of ownership.
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