Taxation of income from business

(a) Review of description of business

Business is defined in the Income Tax Act to include any trade, profession, vocation or
adventure in the nature of trade, but does not include employment.
Business incomes are gains, rewards, benefits, and returns, compensations earned out of a
business undertaking Business income means any income derived by a person in carrying on
a business and includes the following amounts, whether of a revenue or capital nature:
 The amount of any gain, and losses on disposal of assets, derived by a person on the
disposal of a business asset, or on the satisfaction or cancellation of a business debt,
whether or not the asset or debt was on revenue or capital account;
 Any amount derived by a person as consideration for accepting a restriction on the
person’s capacity to carry on business.
 The gross proceeds derived by a person from the disposal of trading stock, i.e. sales.
 Any amount included in the business income of the person under any other section of
this Act
 The value of any gifts derived by a person in the course of, or by virtue of, a past,
present, or prospective business relationship.
 Interest derived by a person in respect of trade receivables or by a person engaged in
the business of banking or money lending.
The definition of business is therefore inclusive rather than specific such that there can be
business which does not arise from trade, profession vocation or adventure in the nature of
trade.
Trade
Trade has the same meaning as commerce and it involves buying and selling or bartering of
goods.
There are many exceptions to this general definition but the following elements are
crosscutting:
• The element of profit
• The regularity of the transactions.
• The arrangements and effort, and,
• Compliance with statutory obligations made to make the transactions work.3
Any of the above may determine whether a trade is carried out. However, depending on the
facts of each case, the existence of these conditions could generally lead to the likelihood of a
trade.
Adventure in the Nature of Trade
This refers to transactions where profits arise from activities such as gambling, speculative
dealings in commodities, single or one off transactions or unconventional transaction e.g.
smuggling.
The definition of an adventure in the nature of trade may appear sometimes to overlap with
trade, but if either is proved, the requirements for business definition are satisfied.
The following characteristics may point to an adventure in the nature of trade.
• Profit seeking.
• The way in which the asset was acquired.
• The nature of the asset.
• Modification of the asset prior to sale or use.
• Interval between purchase and sale of the asset.
• Way in which the sale is effected.
• Number of transactions.
• Existence of trading interest in the same field.
• Method of financing the transaction.
• Profit seeking motive
It is clear that having an intention to make a profit can indicate a trading activity; however,
by itself t is not enough. In the case Salt v. Chamberlain, a research consultant made a loss
on the Stock Exchange after trying to forecast the market. The loss was made after several
years and over 200 transactions. This was not seen as trade as it was capital in nature. It was
concluded that share trading by a private individual can never have the badges of trade
pinned to them. These transactions are subject to capital gains tax.
In another case, Rutledge v. CIR, the taxpayer was on a business trip to Germany and
purchased one million toilet rolls. On returning to the United Kingdom (UK) the sole
consignment of toilet rolls was sold to one individual for a profit. The profit made on this
large quantity, single purchase and resale item was ‘an adventure in the nature of trade. The
case was decided on the fact that the purchase was not made for own use or investment
purposes
• Number of transactions
A single transaction can amount to a trading activity. It is more indicative if there are
repeated and systematic transactions, This was clearly displayed in the case of Pickford v.
Quirke A syndicate purchased a cotton spinning mill with the intension of using it in a trade,
however, on purc
hase of the mill it was in a worse state than first anticipated. The syndicate then decided to
strip the mill of its assets and sell it piecemeal, making a profit. This was repeated a number
of times with a number of mills. Due to the repeated nature of the transactions it was held
that the profits were trading profits end taxable as such.
• Nature of the asset
This principle looks at the asset in question, whether personal assets, investments or
acquired for use in business like plant and machinery.
An important case in this area was Marson v. Morton. This was where land was purchased
with the intension to hold it as an investment. No income was generated by the land,
however, it did have planning permission. The land was sold later following an unsolicited
offer. As the transaction was far removed from the taxpayer’s normal activity (potato
merchant) and was similar to an investment, the profit realised on the sale was not a trading
profit. The transaction was not an adventure in the nature of a trade.
Another case Wisdom v. Chamberlain, looked at the principle of ‘pride of possession’ for
assets that generate no income. A taxpayer purchased two large quantities of silver bullion to
counter the effects of the devaluation of the pound. The purchase was made following
advice and was partly financed by loan. As the purchase was done on a short-term basis in
order to realize profit, there was an adventure in the nature of trade and was, therefore,
assessed as trading profit.
• Existence of similar trading transactions or interests
This is best demonstrated in the case CIR v. Fraser. In this case, the taxpayer was a
woodcutter who bought a consignment of whisky in bond. He subsequently sold the whisky
through an agent at a profit. Within the decision, the judge stated:
The purchaser of a large quantity of a commodity like whisky, greatly in excess of what
could be used by himself, his family and friends, a commodity which yields no pride of
possession, which cannot be turned to account except by a process of realisation, I can
scarcely consider to be other than an adventurer in a transaction in the nature of a trade...
Most important of all, the actual dealings of the respondent with the whisky were exactly of
the kind that take place in ordinary trade.
• Changes to the asset
It is important to take note of any changes or modifications made to an asset that may make
it more marketable. In the case Cape Brandy Syndicate v, CIR, members of a wine syndicate
joined in a separate syndicate to purchase brandy from South Africa. Some was shipped to
the East with the remainder being sent to London to be blended with French Brandy, re-
casked and sold at a profit. The taxpayer tried to argue that the transaction was of a capital
nature from the sale of an investment. It was held that a trade or business was carried on and
was assessable as a trading profit.
• The way the sale was carried out
The usual guidance is that it is always a pointer if a transaction follows that of an
‘undisputed trade’. The case CIR v. Livingston and others, involved three unconnected
individuals that together bought a cargo vessel. The vessel was converted into a steam-
drifter and sold for a profit. The purchase was the first vessel the three individuals bought.
An assessment was raised on the profit which was upheld as a trading profit. Within the
decision, the judge stated: ‘I think the test, which must be used to determine whether a
venture such as we are now considering is, or is not, in the nature of “trade”, is whether the
operations involved in it are of the same kind, and carried on in the same way, as those
which are characteristic of ordinary trading in the line of business in which the venture was
made.’
• The source of finance
Determining the source of finance is important when deciding whether trade is carried on.
Finance taken out to purchase an asset, in the first instance, may indicate that to repay the
debt the asset would have to be sold. This was demonstrated in the case of Wisdom v.
Chamberlain, mentioned above,
• Interval of time between purchase and sale
The length of time an asset is held is an important indicator of trade. The longer the period
of ownership, the greater the chance of the asset being seen as an investment rather than a
trade. Another issue looked at is the intention, if you can demonstrate an intention it could
indicate the tax treatment. The two key cases on this are Wisdom v. Chamberlain and
Marson v. Morton, both mentioned above.
• Method of acquisition
Finally, it is important to look at how an asset is acquired. If it is inherited or gifted, it is a
good indication that a trade is not being carried, although this is not always the case. An
asset acquired at a market could indicate that it has either been purchased for a trade or an
investment.
 The case Taylor v. Good, concerned a taxpayer who purchased a house with the intention of
using it as a family home. The taxpayer’s partner did not approve the house and refused to
move in, which forced the taxpayer to sell the house immediately. The purchaser genuinely
had the intention of not buying the property for a profit motive. As the sale was a short
period of time after purchase it was still not deemed to be a trade.
Within the decision, the judge stated:
“Even if the house was purchased with no thought of trading, I do not see why an intention
to trade could not be formed late, What is bought or otherwise acquired (for example, under
a will) with no thought of trading cannot thereby acquire an immunity so that, however filled
with the desire and intention of trading the owner may later become, it can never be said that
any transaction by him with the property constitutes trading. For the taxpayer a non-trading
inception may be a valuable asset: but it is no palladium. The proposition that an initial
intention not to trade may be displaced by a subsequent intention, in the course of the
ownership of the property in question, is, I think, sufficiently established,
Profession
This is a paid occupation especially one which requires advanced education and training. A
profession usually involves academic training over long periods of time. Take for example
medical Doctors, Lawyers, Engineers, Consultants, Accountants etc providing services other
than in employment are treated as carrying on business.24
Vocation
This is how one passes one’s life when earning a living. More often, it is referred to as a
special calling and qualification for a certain kind of work especially for social or religious
work. It can thus be used to bring within the scope of income tax any form of regular and
continuous profit earning, which does not fall within the categories of trade, business,
profession or employment. Earnings from activities related to religion can fall in this
category. A vocation is simply a calling or something one does because he/she has special
fitness for it e.g. Boxing, Football etc.
(b) Meaning of business income as per Section 18 of the Income Tax Act
An amount is included in business income in the year of income in which the amount was
derived by the person carrying on business. Section 18 of the Income Tax Act includes the
following amounts in business Income whether they are revenue or capital nature;

(i) The amount of any gain, derived by a person on the disposal of a business asset. A
gain on disposal of a business asset is only included in business income when it is realized
and not as it accrues. The realization event is the disposal of the asset.
This section considers the gain on disposal of a business asset other than depreciable asset
or trading stock.
Also note, what is included in business income is a gain on disposal not consideration
received from disposal.

(ii) The amount of any gain, derived by a person on the satisfaction or cancellation of a
business debt. This gain is only included in business income when it is realized and not as it
accrues. The realization event is the cancellation of the debt.
 (iii) Any amount derived by a person as consideration for accepting a restriction on the
person’s capacity to carry on business;

(iv)The gross proceeds derived by a person from the disposal of trading stock. Section 46 of
the ITA provides for the recognition for the cost of trading stock disposed of during the
year of income.

(v) Any amount included in the business income of the person under any other Section of
the Income Tax Act for example compensation receipts under section 61, recouped
expenditure under section 62, balancing charge arising on the disposal of a depreciable
asset under section 27(5) of the Income Tax Act.

(vi) The value of any gifts derived by a person in the course of, or by virtue of, a past,
present, or prospective business relationship;

(vii) Interest derived by a person in respect of trade receivables or by a person engaged in

the business of banking or money lending.

(c) Tax accounting principles

In charging tax, accounting information forms the basis of determining the taxpayer’s
liability. However, it should be observed that some accounting treatments are adjusted to fit
into the tax requirements. Some of these tax specific accounting treatments are explained here
below.

Charging income tax

Gross income; refers to a person’s total amount of business income, employment income and
property income other than income exempt from tax derived during a year of income. Gross
income for a resident person includes the entire person’s worldwide income while for a non-
resident it only includes income sourced from Uganda. The practical implication of this
description is to require a taxpayer to aggregate all incomes earned in the year and tax them
together other than discretely. This will stop the taxpayer from separating their incomes and
enjoy more than one threshold where it is applicable.
Chargeable income; refers to the gross income of the person for the year less total
deductions allowed under the act for the year. Allowed deductions are those expenditures
incurred in deriving the taxpayer’s gross income in given year of income. It’s on the
taxpayer’s chargeable income that the tax rates are applied to determine one’s tax liability.

Periodicity for tax reporting purposes

The concept of periodicity is equally important when accounting for tax purposes. It creates
standard a time which is based on to ascertain when tax reports or returns and payments are
due from the taxpayers. The standard timings are normally at an interval of one year which is
referred to as the year of income for income tax purposes. Year of income in tax sense refers
to a twelve months period ending on 30 th June (the fiscal year in Uganda). It is important to
note that; year of income can also refer to a substitute year or transitional year of income
without the prerequisite of being a twelve months period. Therefore, year of income can be
categorized into three forms which include;
a) Normal year of income:
This is a twelve months period ending on 30 th June (Sec 39 (9)). Every taxpayer is bound
to fulfil his tax obligations following the normal year of income interval system. The
taxpayer may not follow this system only when there is a compelling need which has
been approved by the commissioner.
b) Substitute year of income:
This refers to a twelve months period other than that ending on 30 th June (Sec 39 (1)). For
a taxpayer to use a substitute year of income, the taxpayer is required to apply in writing
to the commissioner showing the compelling need to use the substitute year of income.
As well, a taxpayer granted permission to use the substitute year of income may apply in
writing to change further the taxpayer’s year of income to the normal year of income or to
another substitute year of income (Sec 39 (2)). Approval of the taxpayer’s application is
left to the discretion of the commissioner in consideration of the reasons given for the
compelling need. In addition to the powers to approve the application for the change of
year, the commissioner has the authority to withdraw the permission to use a substitute
year of income that will have been granted. This is done by writing a notice of withdrawal
to the taxpayer.
Commencement of the year of income when the change has been approved
 Where a taxpayer’s application to change to a substitute year of income is
approved by notice of the commissioner, the change takes effect on the date
specified in the notice.
 In a situation where a taxpayer’s application to change back to the normal year or
to another substitute year and in case of withdrawal of permission by the
commissioner, the change takes effect at the end of the substitute year of income
of the taxpayer in which the notice was served.
c) Transitional year of income:
This is the period between the last full year of income prior to the change of year and the date
on which the changed year of income commences. It is treated as a separate year of income
i.e. special returns and other tax matters are filed for it. The transitional year occurs in
situations of changing the year systems i.e. from a normal year to substitute year and vice
versa or in case of withdrawal of earlier permission to change that have been granted.
Exercise;
What reasons may cause a taxpayer to change the reporting year of income?

Method of Accounting
Methods of accounting used by the taxpayer should conform to the generally accepted
accounting principles. The taxpayer is required to account for tax purposes on a cash or
accrual basis unless the commissioner prescribes otherwise in a particular case.

In situations where the taxpayer may wish to change his method of accounting, he/she is
required to apply in writing, to the Commissioner. The application made is subject to
approval by a notice in writing from the commissioner.
Basing on the method of accounting, different taxpayers have been categorized to include;

i) Cash-Basis Taxpayer: this refers to a taxpayer who accounts for tax purposes on a
cash basis. To such a taxpayer, income is derived when it is received or made
available and incurs expenditure when it is paid.
ii) Accrual-Basis Taxpayer: this refers to a taxpayer who accounts for tax purposes on
an accrual basis. To such a taxpayer, income is derived when it is receivable by the
taxpayer and incurs expenditure when it is payable by the taxpayer.
Pre-payments
Where a deduction is allowed for expenditure incurred on a service or other benefit which
extends beyond thirteen months, the deduction is allowed proportionately over the years of
income to which the service or other benefit relates.

Long-Term Contracts
A “long-term contract” means a contract for manufacture, installation, or construction, or, in
relation to each, the performance of related services, which is not completed within the year
of income in which work under the contract commenced, other than a contract estimated to be
completed within six months of the date on which work under the contract commenced.

In the case of an accrual-basis taxpayer, income and deductions relating to a long-term

contract are taken into account on the basis of the percentage of the contract completed
during the year of income. The percentage of completion is determined by comparing the
total costs allocated to the contract and incurred before the end of the year of income with the
estimated total contract costs as determined at the time of commencement of the contract.

In the year of income in which the long-term contract is completed, it is determined that the
contract has made a final year loss, the Commissioner may allow the loss to be carried back
to the preceding years of income and applied against an amount in gross income over the
period of the contract

Trading Stock
Trading stock includes anything produced, manufactured, purchased, or otherwise acquired
for manufacture, sale, or exchange, as well as consumable stores.

A taxpayer is allowed a deduction for the cost of trading stock disposed off during a year of
income. The cost of trading stock disposed of during a year of income is determined by
adding to the opening value of trading stock for the year, the cost of trading stock acquired
during the year, and subtracting the closing value of trading stock for the year.

Opening stock value is; closing value of trading stock at the end of the previous year of
income or; where the taxpayer commenced business during the year of income, the market
value, at the time of commencement of the business, of trading stock acquired prior to the
commencement of the business. Closing value of trading stock is the lower of cost or market
value of trading stock on hand at the end of the year of income.
A cash-basis taxpayer may calculate the cost of trading stock using either the prime-cost
method or absorption-cost method while an accruals-basis taxpayer shall calculate the cost of
trading stock using the absorption-cost method.

Where particular items of trading stock are not readily identifiable, a tax payer may account
for that trading stock on the FIFO method or the average cost method but, once chosen,
changing is with permission

Foreign Currency Debt Gains and Losses

Foreign currency debt” means a business debt denominated in foreign currency. A foreign
currency debt gain is derived or a foreign currency debt loss is incurred by a taxpayer in the
year of income in which the debt is satisfied.
Foreign currency debt gains are included in gross income and foreign debt losses are
deductible only under this Section. A foreign currency debt gain derived by a taxpayer during
the year of income is included in the business income of the taxpayer for that year.
A deduction is not allowed to a taxpayer for a foreign currency debt loss incurred by the
taxpayer unless the taxpayer has notified the Commissioner in writing of the existence of the
debt which gave rise to the loss. The notification should have been done the due date for
furnishing of the taxpayer’s return of income for the year of income in which the debt arose
or by such later date as the Commissioner may allow. However, financial institutions are not
required to have given a prior notice as above.

The following aspects are considered in determining the taxable business income.
Exempt Income.
Allowable deductions
Non-allowable deductions
Capital Deductions
Allowable Deductions
These are expenses incurred in the production of income that are allowable for income tax
purposes. The following are allowed as a deduction for the purpose of ascertaining the
chargeable income of a person for a year of income
In general an expense is allowed if;-
a) All expenditures and losses incurred by the person during the year to the extent to
which the expenditures or losses were incurred in the production of income included
in the gross income
b) The amount of any loss on disposal of assets incurred by the person on the disposal of
a business asset during the year whether or not the asset was on revenue or capital
account
c) In the case of rental income,75% of the rental income as expenditures and losses
incurred by the individual in the production of such income
d) interest on a mortgage from a financial institution as expenditure incurred by an
individual to acquire or construct premises that generate rental income
e) Local service tax paid by an individual
 f) 2% of income tax payable by private employers who prove to URA that 5% of their
employees on full time basis are persons with disabilities
Specific expenses allowed
Meals, refreshment and entertainment;
A deduction is allowed for expenditure incurred by a person in providing meals, refreshment,
or entertainment in the production of income included in the gross income, but only where,
a) The value is included in the employment income of an employee under Section 19(1)
(b) or excluded from employment income by Section 19(2)(d) or (e)
b) The person’s business includes the provision of meals, refreshment and entertainment
and the person to whom the meals, refreshment or entertainment have been provided
have paid an arm’s length consideration for them
Bad debts
A person is allowed a deduction for the amount of a bad debt written off in the person’s
accounts during the year of income
A deduction for bad debt is only allowed-
a) If the amount of the debt claim was included in the person’s gross income in any year
of income
b) If the amount of the debt claim was in respect of money lent in the ordinary course of
a business carried on by a financial institution in the production of income included in
the gross income
c) If the amount of the debt claim was in respect of a loan granted to any person by a
financial institution for the purpose of farming, forestry, fish farming, bee keeping,
animal husbandry or similar operations
Interest
Interest incurred on debt obligation acquired for generating income included in Gross
Income. A person is allowed a deduction for interest incurred during the year of income in
respect of a debt obligation to the extent that the debt obligation has been incurred by the
person in the production of income included in gross income. A “debt obligation” includes an
obligation to make a swap payment arising under a swap agreement and shares in a building
society.
The amount of deductible interest in respect of all debts owed by a taxpayer who is a member
of a group, other than a financial institution or person carrying on insurance business, shall
not exceed thirty per cent of the tax earnings before interest, depreciation and amortization
A taxpayer whose interest exceeds thirty per cent of the tax earnings before interest,
depreciation and amortization may carry forward the excess interest for not more than 3 years
and the excess interest shall be treated as incurred during the next year of income.
Tax earnings before interest, depreciation and amortization mean the sums of the gross
income less allowable deductions except interest depreciation and amortisation.
A group means persons other than individuals with common underlying ownership.
Repairs and Minor Capital Equipment
a) A person is allowed a deduction for expenditure incurred during the year of income
for the repair of property occupied or used by the person in the production of income
included in the gross income.
 b) A person is allowed a deduction for expenditure incurred during the year of income in
acquiring a depreciable asset except returnable containers with a cost base of less than
fifty currency points. One currency point is equivalent to twenty thousand Uganda
shillings. This applies to an asset which functions in its own right and is not an
individual item which forms part of a set.
c) A person is allowed a deduction of an amount representing the diminution in value of
returnable containers not being machinery or plant as deduction for each year of
income
Start-Up costs
A person who has incurred expenditure in starting up a business to produce income included
in the gross income shall be allowed a deduction of an amount equal to twenty five per cent
of the expenditure in the year of income in which the expenditure was incurred and in the
following three years of income in which the business is carried on by the person. For
purposes of the ITA, "expenditure in starting up a business" means-
a. in the case of initial public offering, costs incurred in listing the business with
the Uganda Stock Exchange;
b. in any other case, non-recurring preliminary or preopening costs, which are
associated, with setting up a business such as fees of an accountant, registration
charges, legal fees, costs for promotional and advertising activities, as well as costs
for employee training."
Cost of Intangible Assets
A person who has incurred expenditure in acquiring an intangible asset having an
ascertainable useful life is allowed a deduction in each year of income during the useful life
of the asset in which the person wholly uses the asset in the production of income included in
the gross income of an amount calculated using the formula- A/B where;
A is the amount of expenditure incurred and
B is the useful life of the asset in whole years
Where an intangible asset has been disposed of by the person during the year of income, the
cost base of the asset is reduced by any deductions allowed under this Section to the person in
respect of the asset.
Scientific Research Expenditure
A person is allowed a deduction for scientific research expenditure incurred during the year
of income in the course of carrying on a business, the income from which is included in the
gross income.
“scientific research” means any activities in the fields of natural or applied science for the
development of human knowledge;
“scientific research expenditure”, in relation to a person carrying on business, means the cost
of scientific research undertaken for the purposes of developing the person’s business,
including any contribution to a scientific research institution which is used by the institution
in undertaking research for the purposes of developing the person’s business, but does not
include –expenditure incurred for the acquisition of a depreciable or intangible asset;
expenditure incurred for the acquisition of land or buildings; or expenditure incurred for the
purpose of ascertaining the existence, location, extent, or quality of a natural deposit; and
scientific research institution” means an association, institute, college, or university which
undertakes scientific research.
Training Expenditure
An employer is allowed a deduction for expenditure incurred during the year for the training
or tertiary education, not exceeding in the aggregate five years, of a citizen or permanent
resident of Uganda, other than an associate of the employer, who is employed by the
employer in a business, the income from which is included in the gross income.
Permanent resident in this Section means a resident who has been present in Uganda for a
period or periods in total of five years or more.
Charitable Donations
A person is allowed a deduction for a gift made during a year of income to an organization
within Section 2(bb)(i)(A) or (B) of the definition of “exempt organization”
The value of a gift is the lesser of-
a) the value of the property at the time of the making of the gift; or
b) the consideration paid by the person for the property.
The amount of a deduction allowed under subsection (1) for a year of income shall not
exceed five per cent of the person’s chargeable income, calculated before taking into account
the deduction under this section
Assessed loss brought forward.
Assessed loss arises where the total amount of income is exceeded by the total deductions
allowed to the tax payer. This loss shall be carried forward and allowed as a deduction in
determining the tax payer’s chargeable income in the following year of income.
where, for any year of income, the total amount of income included in the gross income of a
taxpayer is exceeded by the total amount of deductions allowed to the taxpayer, the amount
of the excess, in this Act referred to as an “assessed loss”, shall be carried forward and
allowed as a deduction in determining the taxpayer’s chargeable income in the following year
of income.
Where, for any year of income, the total farming income derived by a taxpayer who is an
individual is exceeded by the total deductions allowed to the taxpayer relating to the
production of that income, the amount of the excess, in this Act referred to as an “assessed
farming loss”, may not be deducted against any other income of the taxpayer for the year of
income, but shall be carried forward and allowed as a deduction in determining the
chargeable farming income of the taxpayer in the following year of income.
The amount of an assessed loss carried forward for a taxpayer shall be reduced by the amount
or value of any benefit to the taxpayer from a concession granted by, or a compromise made
with, the taxpayer’s creditors in the course of an insolvency whereby the taxpayer’s liabilities
to those creditors have been extinguished or reduced, provided such liabilities were incurred
in the production of income included in gross income.

Legal and professional fees like Audit fees, consultancy fees etc are normally allowed as
business expenses incurred on business matters relevant for the production of business
income.
Premiums paid on short leases are normally allowed. Such leases include leased
machinery, buildings, and land to mention but a few.

Damages and compensations incurred for the purposes of trade, and on actions relevant to
the production of income are allowed. Examples include compensations made to clients on
selling defective items to them.
Subscriptions paid or payable to professional and trade associations, which associations
are important to enable the business generate revenue are normally allowed as deductible
expenses.
Salaries, wages and other remunerations paid to employees are allowable, when the
remunerations were made to employees who participated in the production of income or for
business purposes. The employer’s contributions to approved retirement funds are allowable
as business expenses on part of the employer. Redundancy payments and compensations
made on retirement or termination of employment contracts are also allowed as business
expenses.
Staff defalcations, these are losses faced by the business organization, due to dishonesty of
an employee, like embezzlement of cash. They are normally allowed as expenses. However
following the case of Curtis v. J & G Oldfield Ltd (1925) defalcations by a person having
control over the business organization like a proprietor, shareholder or senior employee may
be disallowed as a business expense.
Non Allowable Deductions
Except as otherwise provided in this Act, no deduction is allowed for;
 Any expenditure or loss incurred by a person to the extent to which it is of a domestic
or private nature
 Any expenditure or loss of a capital nature or any amount included in the cost base of
an asset
 Any expenditure or loss which is recoverable under any insurance, contract, or
indemnity
 Income tax payable in Uganda or a foreign country
 Any income carried to a reserve fund or capitalized in any way
 The cost of a gift made directly or indirectly to an individual where the gift is not
included in the individuals gross income
 Any fine or similar penalty paid to any government or a political subdivision of a
government for breach of any law or subsidiary legislation
 A contribution or similar payment to a retirement fund by the employee either for the
benefit of the employee or for the benefit of any person
 A premium or similar payment made to a person carrying on a life insurance business
on the life of the person making the premium or on the life of some other person
 The amount of a pension paid to any person
 Any alimony or allowance paid under any judicial order or written agreement of
separation
 Any expenditure above five million shillings in one transaction on goods and services
from a supplier who does not have a tax identification number
  Expenses of a person who purchases goods or services from a supplier who is
designated to use the e-invoicing system unless the expenses are supported by e-
invoices or e-receipts
Other Deductions
CAPITAL DEDUCTIONS
These are deductions in respect of qualifying capital expenditure. The deductions enable a
taxpayer recover the qualifying capital outlay over a period of time depending on the nature
of the capital expenditure.
Capital expenditure covers the following categories.
• Plant and machinery/ depreciable assets
• Industrial Building
• Initial allowance

Please note that some capital expenses are already allowable expenses and need not be
considered for further deductions e.g. Minor Capital equipment, costs of intangible assets and
start-up costs.
Depreciable Assets (Wear & Tear)
Depreciable asset means any plant or machinery or any implement, utensil or similar article,
which is wholly or partly used, or held ready for use, by a person in the production of income
included in the gross income and which is likely to lose value because of wear and tear, or
obsolescence
Meaning of plant & Machinery
There is no statutory definition of either plant or machinery for capital deduction purposes.
But in the case of Yarmouth v. France (1887), plant is described as: -
"Whatever apparatus used by a business man for carrying on his business, not being
stock in trade, but all goods and chattels, fixed or movable, live or dead, which he
keeps for permanent employment in his business".
The plant and machinery have their values amortised over their useful years in a manner
specified in the Income Tax Act. The specified method is somehow different from what is
practiced in accounting when providing for depreciation of fixed assets.
In the case of Wimpy International Ltd v. Warland (1988) the Judge asserted that the
Yarmouth definition of plant suggests 3 demarcation tests.
i. The item should have active function in the carrying on of the business. For instance
Dormant Generator cannot have its wear and tear written off as a deduction, because
the Generator was not used to generate revenue, in a given year of income.
ii. The item should not be a stock in trade and items so small and expendable should not
be considered as plant and machinery. Items that are stocks in trade do not qualify for
wear and tear. For instance a car dealer cannot write off wear and tear for cars held in
stock, given the fact that these cars are not in active function (items of stock).
iii. The item should be an apparatus with which rather than in which the business is
carried on.
This implies that for an asset to qualify as plant and machinery, such an asset should not be a
building or any other asset in form of premises in which the business is carried on.
1) A person is allowed a deduction for the depreciation of the person’s depreciable assets
during the year of income as calculated in the accordance with this section
2) Depreciable assets are classified into four classes as set out in below
Declining Balance Depreciation Rates for Depreciable Assets
3) New Depreciation Rates Wef 1/07/2021

Clas Assets include Rate

s
1 Computers and data handling 40%
2 Plant and machinery used in farming, 30%
manufacturing and mining.
3 Automobiles; buses, minibuses, goods 20%
vehicles, construction and earth moving
equipment, specialized trucks, tractors,
trailers and trailer mounted containers,
rail cars, locomotives, and equipment;
vessels, barges, tugs, and similar water
transportation equipment; aircraft;
specialized public utility plant,
equipment, and machinery; office
furniture, fixtures and equipment; any
depreciable asset not included in another
class
4) A person’s depreciable assets shall be placed into separate pools for each class of
asset and the depreciation deduction for each pool is calculated according to the
following formula; A*B where
A is the written down value of the pool at the end of the year of income, and
B is the depreciation rate applicable to the pool
5) The WDV of the pool at the end of the year of income is the total of-
a) The WDV of the pool at the end of the preceding year of income after allowing
for the deduction for that year and
b) The cost base of assets added to the pool during the year of income reduced but
not below zero, by the consideration received from the disposal of assets in the
pool during the year of income.
6) Where the amount of consideration received by a person from disposal during the
year of income of any asset or assets in a pool exceeds the WDV of the pool at the
end of the year of income disregarding that amount, the excess is included in the
business income of the person for that year.
7) If the WDV of a pool at the end of the year of income after allowing for the deduction
is less than fifty currency points, a deduction shall be allowed for the amount of that
WDV.
8) Where all assets in a pool are disposed of before the end of a year of income, a
deduction is allowed for the amount of the WDV of the pool as at the end of that year.
 9) Where a person has incurred non-deductible expenditures in respect of a depreciable
asset, it applies as if the expenditures incurred in different years of income were
incurred for the acquisition of separate assets of the same class.
10) The cost base of the depreciable asset is added to a pool in the year of income in
which the asset is placed in service
11) Where a depreciable asset is only partly used in the year in the pd’n of income
included in the gross income, the depreciation deduction allowed shall be
proportionately reduced.
12) The cost base of a road vehicle, other than a commercial vehicle is not to exceed shs.
60,000,000
13) Where the cost base of a road vehicle is beyond 60,000,000, the person is treated as
having acquired two assets-
a) A depreciable asset being a road vehicle with a cost base equal to 60,000,000
b) A business asset that is not a depreciable asset with a cost base equal to the
difference
14) Where a road vehicle is disposed of, the consideration received on disposal is
apportioned between the two assets based on the ratio of the cost base of each asset to
the actual cost base of the asset.
15) Commercial vehicle means-
a) A road vehicle designed to carry loads of more than half a tone or more than
thirteen passengers or
b) A vehicle used in a transportation or vehicle rental business
Initial allowance on plant and machinery
A person who places an item of eligible property into service for the first time outside a
radius of fifty kilometres from the boundaries of Kampala, during a year of income is
allowed a deduction for that year for an amount equal to fifty percent of the cost base of the
property at the time it was placed into service.
Placing “an item of eligible property into service for the first time…” should be interpreted
to mean for the first time in the taxpayer’s business. Therefore where taxpayer ‘B’ buys
equipment which has been used by taxpayer ‘A’ in his business, taxpayer ‘B’ is entitled to
initial allowance in the first year in which he puts the same equipment to use
notwithstanding that ‘A’ got initial allowance in respect of the same equipment.
“item of eligible property” means plant and machinery wholly used in the production of
income included in gross income but does not include—
(a) goods and passenger transport vehicles;
(b) appliances of a kind ordinarily used for household purposes; or
(c) office or household furniture, fixtures and fittings.
Note that for item to qualify for initial allowance it had to fall within in the definition of an
item of eligible property and the rate applicable would depend on the location of the
taxpayer.
Implication to depreciation allowance
The cost base of an asset is reduced by the amount of the deduction allowed for purposes of
computing wear and tear i.e. the amount included in additions in the depreciation schedule
will be cost less initial allowance.
 Initial allowance on industrial buildings
A person who places a new industrial building in service for the first time during the year of
income is allowed a deduction for that year of an amount equal to 20% of the cost base of
the ‘industrial building at the time it was placed in service.
The cost base of an industrial building qualifying for initial allowance is reduced by the
amount of deduction allowed for the purposes of calculating industrial building deduction
(IBD) i.e. the qualifying amount of IBD will be cost less initial allowance.
Capital expenditure on the extension of an existing industrial building, would be treated a
construction of a separate industrial building and would be entitled to initial allowance if it
qualified.
For the purposes of Initial allowance, a new industrial building or extension of an existing
industrial building means that building on which construction was commenced on or after
1st July 2000.
Industrial building for initial allowance purposes excludes an approved commercial
building; hence, the following could not qualify for initial allowance: an industrial building
which is primarily used by the owner or let out for rent, for the purpose of carrying on a
business, trade or profession; as an office; as a warehouse or commercial storage facility; or
as a workshop.
Industrial buildings deduction (IBD) (Sec 29)
Important definitions
Industrial building means any building which is wholly or partly used or held ready for use,
by a person in:
• manufacturing operations;
• research and development into improved or new methods of manufacture;
• mining operations;
• an approved hotel business;
• an approved hospital; or
• approved commercial buildings.
Capital expenditure for industrial building purposes excludes:
• Cost of a depreciable asset installed in an industrial building like partitions; or
• Cost of any rights in or over any land.
Note: a depreciable asset installed in a building includes items that can be removed from the
building without substantial damage to the building or affecting the operations of the
building like partitions, generator, wall fans, but items that are ordinarily part of the building
like electrical wiring works, plumbing works, windows, doors, lifts are part of the building.
Qualifying expenditure for IBD is cost of the industrial building less initial allowance,
where applicable.
Residue of expenditure (residual value) means;
Capital expenditure incurred on the construction of an industrial building less any
deductions allowed and any amounts which would have been allowed deductions if the
building was sole used for prescribed uses at all times since construction was completed.
Prescribed uses are those contained in the definition of an industrial building
(manufacturing, research and development, mining, approved hotel, approved hospital; or
approved commercial buildings).
 Note that residential accommodation is not an approved industrial building and does not
qualify for IBD.
Also, note that IBD is at times referred to as Industrial Building Allowance (IBA) and this
should not be confused with initial allowance.
Rules for computing IBD
i) A person who has incurred capital expenditure in any year on the construction of an
industrial building and the building is used in business by the person during the year, the
person is allowed a deduction for the depreciation of the building calculated as follows:
A x B x C/D, where:
• A is the depreciation rate applicable to the building — 5% on straight line basis
• B is the capital expenditure incurred in the construction of the building;
• C is the number of days in the year of income during which the asset was used or was
available for use; and
• D is the number of days in the year of income (365 days)
IBD is time apportioned unlike wear & tear that is not apportioned.
i) Where an industrial building is only partly used (business and non business use)
by a person during a year for prescribed uses, IBD shall be proportionately
reduced. Where an industrial building is only partly used by a person during a
year for prescribed uses, and the construction cost of that part of the building used
for non-prescribed use is not more than ten percent (10%) of the total cost of the
building, it is treated as wholly used for business use.
Example 9
Property Minders Limited owns two recently constructed bulidings in the central division of
kampala city. One of the buldings located in Kimathi Avenue is rented out as an office and
was completed in 31st March 2014 at a cost of UShs 2bn, About 5% of the building is,
however, used as a personal office for one of the directors Mr Khahd Ahmed. The second
building is a flat (2 storeyed) located on Old Kampala Road where the company uses the
ground floor as a supermarket and first floor as a residence for the MD. It was completed
and occupied in 1 September 2013 at a cost of UShs 800m.
Required:
Compute the IBD the company will be entitled to claim for the year ended 30 June 2014.
iii) Where a person has made a capital improvement to an industrial building, the cost
incurred is treated as construction cost of a separate industrial building. A capital
improvement for instance may include adding an additional room to the existing building.
iv) Where an industrial building is purchased by a person, the person is deemed to have
incurred the capital expenditure incurred by the person who constructed the building - IBD
is only on cost of construction not purchase price.
Example
MK Property Limited purchased a commercial budding located in Kololo at UShs 5bn in
October 2014 The building was owned by YT Traders Limited and had constructed it at a
cost of UShs 2.4bn and put in use in January 2010. MK Property Limited is using the
building as office premises,
Required:
Compute the IBD that the company will be entitled to claim for the year ended 31
December2014.
v) IBD cannot exceed the residue cost (value) at the end of the year. IBD is computed on
straight line and the entire cost is claimed for maximum period of 20 years. At any one time,
the IBD cannot exceed the residue value. If the residue value is not known, then no IBD can
be claimed.
Example
Mr. John Ssenkeeto constructed a commercial building located in Kawala Rubaga Division
Kampala at UShs 350m and started renting it out in January 1994. He was registered for
taxes and claiming related capital allowances. In January 2014, Real Finance Limited
purchased the building at UShs 800m and immediately set up its office in the building.
Required
Compute the IBD that the company will be entitled to claim for the year ended 31 December
2014.
vi) where an industrial building has been disposed during a year of income, the cost base of
the building is reduced by any deductions allowed in respect of the industrial building
vii) Where an industrial building is bought and sold together with land, the value of the land
shall be the difference between proceeds and residue value at the time. Land is not
depreciated and its disposal gives rise to CGT. Buildings are depreciated and on disposal, a
balancing charge or allowance is determined. Where the value of land and buildings is not
separated, then it is deemed that the value of proceeds less the residue value of the building
will be the value of land.
viii) In cases of disposal of an industrial building with an extension, disposal proceeds shall
be reasonably apportioned among the separate industrial buildings.
Example
Jumbo supplies limited owned a commercial building located in Busega that cost UShs
700m to construct in 2000. In 2010, it was realized that there was serious need for increased
storage space and a big store was constructed as an extension to the building and it cost
500m and was put to use in the same year 2010. In July 2014, the building was sold at UShs
1.2bn.
Required:
Compute the capital gains arising from the disposal of the building.
Farm works
Expenditure incurred in acquiring farm works is included in the person’s pool for class 4
(IV) assets and is depreciated accordingly.
A person carrying on a business of horticulture in Uganda who has incurred capital
expenditure on acquisition or establishment of a horticultural plant; or construction of a
greenhouse, is allowed a deduction of twenty percent (20%) of the cost in the year of
expenditure and in the following four years, that is, five equal installments.
Important definitions
Capital expenditure incurred on the establishment of a horticultural plant shall include
expenditure incurred in draining or clearing land.
Farm works means any labour quarters and other immovable buildings necessary for the
proper operation of a farm, fences, dips, drains, water and electricity supply works,
windbreaks, and other works necessary for farming operations carried on to produce income
included in gross income, but excludes farm houses or depreciable assets,
Horticulture includes:
 propagation or cultivation of seeds, bulbs, spores, or similar things;
 propagation or cultivation of fungi; or
 Propagation or cultivation in environments other than soil, whether natural or
artificial.
Example
Gomba Farmers Limited is involved in farming activities mainly growing flowers in green
house for export to Scandinavian countries. During the year ended 30 September 2015, it
incurred the following expenditure:
Item UShs
Clearing and drainage of land 63,500,000
Construction of greenhouses 120,000,000
Construction a fence 44,000,000
Total 227,500,000
Required:
Compute Capital allowances that Gomba Farmers Limited would claim for the year ended
30 September 2015.

TAXATION OF INDIVIDUALS
Small business taxpayers (Sec 4(5)) — Presumptive tax
Where the gross turnover of a resident taxpayer for a year of income derived from carrying
on a business or businesses is less than one hundred fifty million shillings (effective 1 July
2015), other than those mentioned below, the income tax payable by the taxpayer for the year
of income shall be determined in accordance with the Second Schedule of ITA, unless the
taxpayer elects by notice in writing to the Commissioner to file a tax return.
A person dealing in the following business does not qualify to account for tax under the small
taxpayers’ regime:
• Professional services like, medical, dental, architectural, engineering, accounting,
legal, or other professional services.
• Public entertainment services.
• Public utility services.
• Construction services.
In this case:
• The tax shall be a final tax on the business income of the taxpayer;
• No deduction shall be allowed for expenditures or losses incurred in the production of
the business income; and
• No tax credits shall be used to reduce the tax payable on the business income of the
taxpayer, except credit allowed for withholding tax paid or provisional tax paid in
respect of amounts included in the gross turnover of the taxpayer.
An election must be lodged with the Commissioner by the due date for the taxpayer’s return
for the year of income to which it relates.
The above regime is also called presumptive tax.
Presumptive tax otherwise called the small taxpayers regime is a form of assessing tax
liability using indirect methods such as income reconstruction or by applying base-line
taxation across the entire tax base. Presumptive methods of taxation are thought to be
effective in reducing tax avoidance as well as equalizing the distribution of the tax burden.
They are suitable where the taxpayers do not keep proper records.
Presumptive tax can be used by an individual taxpayer whose turnover does not exceed 150m
(effective 1 July 2015) and who is not prohibited from using it by the ITA.
The tax payable by a presumptive tax payer is reduced by;
 any credit allowed for withholding tax paid in respect of amount included in the gross
turnover of the taxpayer or;
 any credit allowed for provisional tax paid in respect of amounts included in the gross
turnover of the tax payer
Small Business Taxpayers Schedule (effective 1July 2020)
Gross turnover Tax rates Tax rates with records
without
records
Where the gross turnover of the taxpayer Nil Nil
does not exceed UShs. 10 million per
annum
Where the gross turnover of the taxpayer Eighty 0.4% of the annual turnover in
exceeds UShs. 10 million but does not thousand excess of 10 million shillings
exceed UShs. 30 million per annum shillings
Where the gross turnover of the taxpayer Two hundred Eight thousand shillings plus 0.5%
exceeds UShs. 300 million but does not thousand of the annual turnover in excess of
exceed UShs. 50 million per annum shillings 30 million shillings
Where the gross turnover of the taxpayer Four hundred One hundred and eighty thousand
exceeds UShs. 50 million but does not thousand plus 0.6% of the annual turnover in
exceed UShs. 80 million per annum shillings excess of 50 million shillings
Where the gross turnover of the taxpayer Nine hundred Three hundred and sixty thousand
exceeds UShs. 80 million but does not thousand plus 0.7% of the annual turnover in
exceed UShs. 150 million per annum shillings excess of 80 million shillings

Example 1
Mr. Mukwasi Melody operates a shop in Busia Town Council where he sells general
merchandise He does not keep proper records but maintains a receipt book showing sales
made. During the year ended 31 December 2014, the following were his transactions
His gross takings totaled UShs 38,400,000, He paid salaries to the shop attendant of UShs
4,000,000, paid rent of UShs 5,800,000 and other expenses totaling UShs 10,000,000.
During the year, he also imported some items from Kenya and paid duties to URA at Busia
border post totaling UShs 2,486000 including withholding tax of UShs 432,100.
Required:
Compute the tax payable by Mr. Mukwasi Melody for the year ended 31 December 2014.
Example 2
Gift Mukundane operates a wholesale shop in Mbarara Municipality dealing in wines and
spirits. She does not keep proper records but maintains a sales book where she records all
sales made. During the year ended 31 December 2019, she made the following transactions.
Her total sales amounted to UShs 124,590,000. She paid rent of UShs 12,000,000 and other
expenses totaling to UShs 36,000,000.
Required:
Compute the tax payable by Gift Mukundane for the year ended 31 December 2019.
Question 3
Maureen Nambi operates-a hair and beauty salon called Nice & Lovely Salon in Kasubi,
Rubaga Division, Kampala City. She is not well versed with keeping proper records but she
records all cash received on daily basis and all clients pay cash anyway. During the year
ended 31 December 2020, the total cash received was UShs 32,900,[Link]:
Compute the tax payable by Maureen Nambi for the year ended 31 December 2020.

Taxation of individuals (Sec 63)

The chargeable income of each taxpayer who is an individual is determined separately. Gross
income of an individual includes business income, employment income and property income.
Income from all sources is added up except rental income which is subject to rental tax.
In determining chargeable business income, only income from the individual’s business is
considered as well as business expenses. For instance; income from sale of an individual’s
assets does not attract CGT being that it is not a business asset.

Refer to the definitions of business income and gross income as earlier provided under
corporation tax
Allowable and non-allowable deductions of an individual
i. An individual is granted all allowable deductions including capital deductions on
assets that are owned by the business. For assets to qualify to be the assets of the
business, they should have been acquired with funds obtained from the business and
the assets are used in the course of running the business. Thus if an individual has his
own commercial premises and uses the premises to operate his shop, the premises are
his and are not owned by the business but if he makes money and acquires a new
building, that would be an asset of the business.
ii. Private expenditure is not allowable for income tax purposes and there is need to pay
attention to transactions involving expenses of the owner being paid by the business
like school fees for children, stock appropriation (taking items for private use without
paying for them) and drawings.
iii. Another common issue is the private use of the assets owned by the business like using
a business vehicle for private errands of the owner. There will be need for
apportionment in cases of business and nonbusiness use of assets of the business.
iv. There is another issue of owner’s salary and other personal expenses like lunch and
medical expenses. The key principle is that one cannot employ him or herself. That
 being the case, owner’s salary is deemed to be an appropriation of profit and is added
back. Salaries paid to other person’s including relatives who are employed by the
business are allowed. Owner’s medical expenses and lunch are expenses of domestic
nature and not allowed.

Computation of chargeable income f an individual and tax payable

Important to note:
i. In dealing with tax computations of individuals with business income, we should
remember that there is no legal requirement for individuals to prepare audited
accounts so students need to use their accounting skills to come up profit or loss
account or its equivalent that will be used for tax computation purposes, where there
are no audited accounts.
ii. When coming up with accounts consider only business transactions leaving out
personal transactions of the owner.
iii. Most individuals have multiple sources of income that would be included in gross
income other than rental income that is taxed separately
iv. There is need to observe whether the person’s turnover is below UShs 150m (was 50m
up to 30 June 2015) to use small business taxpayers schedule, if the business is not
that prohibited for such regime.
v. Adjustments (add backs, allowables and tax credits) in the tax computation are similar
to what we covered under corporation tax except that transactions of the owner need
to be scrutinized and added back if settled by funds from the business.
vi. Even where the business is trading through registered business name, the taxpayer is
the owner as the business name has no legal personality.
vii. Individual rates (resident and non resident) apply to determine tax payable as used
under PAYE.
viii. Any tax credit like withholding tax or PAYE already paid is allowable against tax
payable as the case may be.

Example 1
Mr. Kasambula Martin operates a hotel in Mukono Municipality. Results for the year ended
30 September 2015 are as shown below:
Total revenue was UShs 329,800,000 and Cost of sales was UShs 219,643,000. He employed
nine workers (waitresses and cooks) and each was paid a gross salary of UShs 450,000 per
month. The Chef and Manager were paid UShs 600,000 and UShs 700,000 per months,
respectively.
The landlord Mr. Muggaga Robert was paid rent of US$ 8,000 at the beginning of the year
whenlUS$ = UShs 3,540. He paid trading license to Mukono Municipal Council of UShs
1,200,000 and security and utilities were UShs 3.600,000 and 4,800,000 per annum,
respectively.
During the year, Martin bought a plot of land at UShs 15m in Bukerere where he intends to
construct his home. He also bought a truck with loading capacity of 3.5 tons to be used in
transporting food items bought from villages. It cost him 30m. all the money used to buy the
asset was from the business.
He paid provisional tax of UShs 800,000 only.
Required:
Compute and advise the tax payable by Mr. Kasambula Martin for the year ended 30
September 2015.
Question 2
Mrs. Catherine Murungi operates a wholesale shop in kikuubo dealing in general
merchandise. She is also employed as an accountant with an NGO based in western Uganda
and has residential apartments in Konge Kampala. Results for the year ended 31 December
2014 are as shown below:
Her gross takings totalled UShs 223,845,000 and cost of sales was UShs 149,204,000. She
paid gross salaries to shop attendants totalling UShs 21,980,000 and even paid the respective
PAYE to URA. Rent for the shop was UShs 24,000,000. Other operating expenses totalling
UShs 32,800,000 were incurred of which depreciation was UShs 3,128,876.
She took away stock worth UShs 3,860,000 for her personal use and the sister. She also used
the business money to pay school fees for her son at Ritah Memorial School of UShs
4,800,000.
Catherine also made drawings of UShs 8,500,000 during the year. She collected UShs
48,000,000 from her apartments and incurred expense of UShs 13,400,000 on their
maintenance.
During the year, she suffered withholding tax of UShs 4,870,000 in respect of supplies to a
government body. She paid provisional tax in four installments of UShs 350,000 each and her
capital allowances were UShs 7,124,400.
Catherine has also suffered PAYE of UShs 12,430,000 from her annual employment income
of UShs 53,390,800.
Required:
Compute the tax payable by Mrs. Catherine Murungi for the year ended 31 December 2014
CAPITAL GAINS TAX
Capital gains tax (CGT) is a tax on a gain arising out of disposal of a business asset
a) Business Asset
A business asset is an asset which is used or held ready for use in a business, and includes
any asset held for sale in a business and any asset of a partnership or company. This
definition makes any kind of partnership or company asset, a business asset including shares
owned by a company in other companies but not its own shares which are owned by its
shareholders.
CGT arises on disposals of non-depreciable assets; mainly land, shares and non- depreciable
part of an expensive vehicle.
ITA does not provide for separate treatment of capital gains tax from corporation tax. Capital
gains are added back in the tax computation and hence they are part of business income taxed
at 30%. However, where a stand-alone question on CGT asks for CGT payable, 30% is
applied to the capital gains to get CGT.
b) Cost base of an asset
The cost base of an asset purchased, produced, or constructed by the taxpayer is the amount
paid or incurred by the taxpayer in respect of the asset, including incidental expenditures of a
capital nature incurred in acquiring the asset, and includes the market value at the date of
acquisition of any consideration in kind given for the asset. The cost base will be the amount
of the consideration deemed to have been received by the person disposing of the asset.
i. The cost base of an asset acquired in a non-arm’s length transaction is the market
value of the asset at the date of acquisition,
ii. Where a part of an asset is disposed of, the cost base of the asset shall be apportioned
between the part of the asset retained and the part disposed of in accordance with
their respective market values at the time of acquisition of the asset.
iii. Expenditures incurred to alter or improve an asset which have not been allowed as a
deduction are added to the cost base of the asset.
iv. Where the acquisition of an asset by a taxpayer represents the derivation of an
amount included in gross income, the cost base of the asset is the amount included in
gross income plus any amount paid by the taxpayer for the asset.
v. Where the receipt of an asset represents the derivation of an amount which is exempt
from tax, the cost base of the asset is the amount exempt from tax plus any amount
paid by the taxpayer for the asset.

c) Disposal of an asset (Sec 51)

i. A taxpayer is treated as having disposed of an asset when the asset has been:
- sold, exchanged, redeemed, or distributed by the taxpayer;
- transferred by the taxpayer by way of gift; or
- destroyed or lost.
ii. A disposal of an asset includes a disposal of a part of the asset.
iii. Where the Commissioner is satisfied that a taxpayer has converted an asset from a
taxable use to non-taxable use; or vice versa the taxpayer is deemed to have disposed
of the asset at the time of the conversion for an amount equal to the market value of
the asset and to have immediately reacquired the asset for a cost base equal to that
same value.
iv. A non-resident person who becomes a resident person is deemed to have acquired all
assets, other than taxable assets, owned by the person at the time of becoming a
resident for their market value at that time.
v. A resident person who becomes a non-resident person is deemed to have disposed of
all assets, other than taxable assets, owned by the person at the time of becoming a
non-resident for their market value at that time.
vi. Where a resident person referred to above intends, in the future, to reacquire status as
a resident person; and provides the Commissioner with sufficient security to satisfy
any tax liability which would otherwise arise on the deemed disposal, the
Commissioner may, by notice in writing, exempt the person from the applicable tax.
A taxable asset means an asset that the disposal of which would give rise to a gain included
in the gross income of, or a loss allowed as a deduction to, a resident or non – resident
taxpayer.
d) Gains or losses from disposal
Gain (capital gain) from disposal is the excess of the consideration received for the disposal
(disposal proceeds) over the cost base of the asset, Conversely, there may be a capital loss
when the cost base of the asset is higher than the consideration received for the business
asset.
1. Asset disposal under non - arm’s length transactions (Sec 53)
The consideration received on disposal of an asset includes the market value at the date of
the disposal of any consideration received in kind.
Transactions between related parties or associates are usually deemed to be non-arm’s length
transactions. Arm’s length principle is applied to determine whether transactions took place
without any other consideration like relationship. An arm’s-length transaction is a
description of an agreement made by two parties freely and independently of each other, and
without some special relationship, such as being a relative, having another deal on the side
or one party having complete control of the other. It is a transaction between knowledgeable
unrelated willing buyer - willing seller. The main feature of such transactions is that price in
non-arms-length transactions may be lower than market value.
Section 53 (2) of the ITA provides that where an asset is disposed of to an associate or in a
non-arm’s length transaction other than by way of transmission of the asset to a trustee or
beneficiary on the death of a taxpayer, the person disposing of the asset, is treated as having
received consideration equal to the greater of:
• the cost base of the asset to the disposer at the time of disposal; or
• the fair market value of the asset at the date of disposal.
Example 1
Multiple Housing Limited owned 2 acres of land at Kiwatule which were undeveloped. In
March 2015, the land was sold to Homesland Limited an associated company in the real
estate business. The land was valued at UShs 800m in its books but its market value is UShs
1.2bn basing on published prices for similar properties in the area. Hornesland Limited paid
UShs 820m for the piece of land.
Required:
Advise Multiple Housing Limited on the consideration that would be used to compute
capital gains tax on the disposal.
Solution:
Since the transaction was between associates, the consideration will the greater of; the cost
base of the land to Multiple Housing Limited at the time of disposal (UShs 800m and the
fair market value of the land at the date of disposal (UShs I .2bn).
Therefore, the consideration for capital gains tax purposes will be UShs 1.2bn,
Disposal of two or more assets
Where two or more assets are disposed of in a single transaction and the consideration paid
for each asset is not specified, the total consideration received is apportioned among the
assets disposed of in proportion to their respective market values at the time of the
transaction.
2. Non recognition of a gain or loss (sec 54)
No gain or loss is taken into account in determining chargeable income in relation to;
• a transfer of an asset between spouses,
 • a transfer of an asset between former spouses as part of a divorce settlement or bona
fide separation agreement;
• an involuntary disposal of an asset to the extent to which the proceeds are reinvested
in an asset of a like kind within one year of the disposal; or
• the transmission of an asset to a trustee or beneficiary on the death of a taxpayer.
In cases where no gain or loss is taken into account as a result of a transfer between spouses;
former spouses or to a trustee or beneficiary on the death of a taxpayer, the transferred or
transmitted asset is deemed to have been acquired by the transferee, or trustee or beneficiary
as an asset of the same character for a consideration equal to the cost base of the asset to the
transferor or deceased taxpayer at the time of the disposal.
On the other hand, the cost base of a replacement asset in the case of an involuntary disposal
is the cost base of the replaced asset plus the amount by which any consideration given by
the taxpayer for the replaced asset exceeds the amount of proceeds (including compensation
payment) received
An involuntary disposal of an asset would refer to situations where a taxpayer is deprived
of the property other than in a voluntary sale like; asset being destroyed in accident, by fire,
by floods, the asset being stolen or otherwise lost, and disposal subject to certain conditions
including compulsory acquisition by government.
In the appeal case, URA v. Bank of Baroda, appeal from Tax Appeals Tribunal, TAT 05 of
2005, the Hon. Justice Geoffrey Kiryabwire upheld the TAT ruling that the sale of 20% in
Bank of Baroda was an involuntary disposal not subject to CGT.
…….“I, therefore, find that the sale of 20% shares was involuntary and that TAT found
correctly in this regard.”
Example 2
Triple Choice Limited owned a commercial building located at Nalya. The building was
valued at UShs 750rn and insured with international Insurers Limited. In January 2014, the
building was completely destroyed by fire. Fortunately, the company received compensation
in April 2014 from the insurance company worth UShs 800m. It immediately embarked on
reconstruction of the building and completed the construction in February 2015. The
reconstruction cost UShs 1.5bn.
Required:
Advise Triple Choice Limited regarding the cost base of the replacement asset.
Transitional provisions regarding capital gains tax (Sec 166)
CGT was introduced in Uganda effective 1 April 1998. Regarding assets acquired before 1
April 1998, transitional provisions specified their treatment. Under the transitional
provisions, capital gains tax does not apply to business assets of a capital nature disposed of
before 1st April 1998 or to business debts of a capital nature cancelled or satisfied before 1
April 1998.
a) Market value of property as at 31 March 1998
Effective 1 April 1998, for assets that were in existence, where a gain or loss on disposal of
an asset is subject to tax, the cost base of the asset is calculated on the basis that each item of
cost or expense included in the cost base and which was incurred prior to that date is
determined according to the following formula:
CB x CPID
 CPIA
where CB is the amount of an item of cost or expense incurred on or before 31 March 1998
included in the cost base of the asset;
CPID is the Consumer Price Index (CPI) published for the month ending on 31 March 1998;
and
CPIA is the Consumer Price Index number published for the month immediately prior to the
date on which the relevant item of cost or expense was incurred.
The above is called indexation and was meant to remove the effect of inflation for the gain
on disposal. However, such mechanism applies only to assets that were in existence at the
introduction of CGT.
Where the taxpayer is able to substantiate the market value of an asset on 31 March 1998,
the taxpayer may substitute that value for the cost base determined above.
b) Value of property by the chief government valuer
Where the asset is immovable property, the cost base of the property as at 31 st March 1998 is
equal to the market value of the property as determined by the Chief Government Valuer.
C) Cost base of an asset under certificate of incentives
Where an exemption for a holder of certificate of incentives under the Investment Code
1991 expires, reference to 31st March 1998 for CGT purposes is treated as a reference to the
day on which the exemption expired.
5. Computation of capital gains tax on various disposals
Important formula
Capital gains = disposal proceeds (consideration received) — cost base of the asset.
Capital gains tax on commercial building and expensive car
Important to note:
We have already looked at the computation of capital gains in respect of a commercial
building including where the value of land is not separately disclosed and non- depreciable
part of an expensive vehicle, in Chapter 2. That information should be used in the
computations that follow, where necessary:
Example 3
TMC Limited’s year of income ends on 31 December. During the year ended 31 December
2014, it sold its old building located at Zana at a price of UShs 825 million. The building
had cost UShs 280million in 2005 when it was built and put into use for the first time. The
value of the land included in the sale proceeds is UShs 125 million. The value of the land at
the time the building was constructed was UShs 60 million.
The company also sold a motor vehicle a Land Cruiser Prado in December 2014 at a cost of
UShs 55 million which had cost UShs 140 million in January 2010.
Required
i) compute the capital gains arising from the sale of land and the motor vehicle
ii) compute the CGT payable by the company for the year ended 31 December 2014.
Capital gains on land
It is important to remember that all incidental expenditure incurred in the process of
acquiring land become part of the cost of land
Example 4
Property Holdings Limited is a real estate company based in Jinja District. In June 2015, the
company sold 4 acres of land located in Walukuba estate at UShs 400m. The land had been
purchased in January 2000, at UShs 230m. The transfer process was done at UShs 16.5 m,
the surveying and opening boundaries cost UShs 12.3m and the company incurred 61.9m to
relocate the squatters that had refused to enable possession of land.
Required
Compute the capital gains tax payable by Property Holdings Limited on the Disposal of the
4 acres of land
Capital gains tax on shares
CGT is payable on disposal/ sale of shares in a private limited company hence sale of shares
listed on the stock market are not subject to CGT. The provision introducing CGT on shares
came into effect on 1 July 2010.
The cost base of shares is the cost incurred to acquire the shares – nominal value of the
shares plus any incidental expenditure incurred in the process of acquisition of shares like
legal fees.
Example 5
Crystal clear Limited invests in shares of various companies. During the year ended 30 June
2015, it sold 500 shares in Karibu Hotel Limited a listed company. The shares were sold at
UShs 40,000 per share. They were acquired at UShs 25,000 per share. In the same months,
the company sold its 60% shareholding in Ushindi Limited a private aviation company that
is struggling to keep a float due to industry conditions. The share capital of the company is
as follows:
Authorised share capital 2,000,000,000
Paid up share capital 1,000,000,000
The company received UShs 500,000,000 in respect of the disposal of its interests in
Ushindi limited.
Required
Compute capital gains tax payable by Crystal Clear Limited on the disposal of its shares in
Karibu Hotel Limited and Ushindi Limited.