Section 30: A transitional year of income - is a period of less than 12 months that falls between the person's previous accounting date and a new accounting date. This results from a change in

a person's accounting date 11.0 SCOPE OF TAX LIABILITY The scope of liability to tax depends on a person's residence status. Income tax is imposed on Income from business, employment and property. For a resident person, income tax is charged on gross income from all over the world while for a non- resident person is only charged on income derived from sources within Uganda. Income tax is charged on every person who has chargeable income for each year of income. Chargeable income is derived from three main sources of income, namely; business, employment and property. Income tax is administered under the Income Tax Act (1997) Cap 340 on chargeable income. As earlier noted, chargeable income is the gross income of a person for the of income less total deductions allowed under the income tax act. 12.0 SOURCES OF INCOME 12.1 Business Income Business is defined in the Income Tax Act to include any trade, profession, vocation or adventure in the nature of trade. 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 Gains or losses from the disposal of business assets such as land and buildings. • Any amount derived by a person as consideration for accepting a restriction on the person's capacity to carry on business. For example, if Mama Rhoda gives Senku- buge Shs. 100,000 to relocate his shop to another area, the Shs. 100,000 becomes business income to Senkubuge. • The gross proceeds derived by a person from the disposal of trading stock, i.e. sales. • 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. • Rent derived by a person whose business is wholly or mainly the holding or letting of property. 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. 12.1.1 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. 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. 12.1.2 Adventure in the Nature of Trade This refers to transactions where profits arise from activities such as gambling, specula- tive dealings in commodities, single or one off transactions or unconventional transaction e.g. smuggling. The definition of an adventure 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. 12.1.3 Profession This is a paid occupation especially one which requires advanced education and training, e.g. architecture, accounting, law and medicine. 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. Business income is considered if it is 'derived' during the year of income. 'Derive' has been judicially determined to be equivalent to 'accrue' or 'arising', which also relates to the source of income. 12.1.4 Capital Gains Capital gains arise from the disposal of a business asset that is not a depreciable asset, such as land and buildings as well as sale of shares and commercial buildings. A disposal of an asset occurs when an asset has been sold, exchanged, redeemed, distributed, transferred by way of gift, destroyed or lost by the taxpayer. The Capital gain is the excess of the consideration over the cost base of the asset. Conversely, there may also be a loss when the cost base of the asset is higher than the consideration received for the business asset. Cost base of an asset 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. Capital gains are included in the gross income of the taxpayer and assessed as a business income. Calculation of tax on capital gains In the calculation of tax on capital gains, indexation is provided for in order to account for inflation. This means that before determining tax on capital gains, one will factor in inflation among others that influence the asset value. However, indexation only applies where the asset is sold after 12 months from the date of purchase of that Asset. The prescribed formula is: CB x CPID/CPIA, where; CB is the amount of an item of cost or expense incurred; CPID is the Consumer Price Index number published for the calendar month of sale; 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. Example: A piece of land in June 2022 for Shs.10, 000,000 and sold it in August 2023 for Shs.25,000,000. The Consumer Price Index (CPIA) for May 2022 was 153.25 and the Consumer Price Index (CPID) for August 2023 was 181.67 In this case, the cost of acquisition of the land with inflation considered would be; CB x CPID/CPIA, where; CB= 10,000,000 CPID= 181.67 CPIA=153.25 10,000,000 x 181.67/153.25 = 11,854,486 So, the taxable capital gain would be; 25,000,000 - 11,854,486 = 13,145,514 UGX And tax at 30% would be; 13,145,514 X 30% = 3, 943,654 UGX If the land was purchased and sold within 12 months from the date of the purchase, the capital gains would be computed by deducting the original purchase price (cost base) from the selling price. There is no consideration for inflation when computing the cost base of the asset. So, the taxable capital gain would be; 25,000,000 - 10,000,000 = 15,000,000 And tax at 30% would be; 15,000,000 X 30% = 4, 500,000 UGX Therefore, indexation creates a tax saving of shs.556, 346. 12.2 Employment Income Any income derived by an employee from any employment, whether past, present or in future, including the value of any benefit, advantage or facility granted to an employ- ee constitutes employment Income. An amount or benefit is derived in respect of em- ployment if it is provided in respect of past, present or prospective employment. It also includes an amount or benefit provided by a third party under an arrangement with an employer or an associate of the employer; and it does not matter whether it is paid to the employee or to his associates. Employment is regarded to exist where there is a contractual relationship between mas- ter and a servant for a pay. Employment refers to: • Position of an individual in employment of another person. • Directorship of a company. • A position entitling the holder to a fixed or ascertainable remuneration. • Holding or acting in a public office. It is important to distinguish between an employee and an independent contractor. As a general rule, an individual who does not satisfy the definition above automatically be- comes an independent contractor. Factors to consider when distinguishing between employees and contractors: • Who has control over hours of work? • Who has control over location of place of work? • Who has control over sequence of work? • Who furnishes the tools, equipment and materials? • Whether the work has a risk of profit or loss? An employer means a person (individual or corporate) who employs/remunerates an in- dividual while an employee is an individual engaged in employment 12.2.1 Composition of Employment Income According to the Income tax Act cap 338, Employment income includes: • Wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity, bonus, allowances (entertainment, duty, utility, welfare, housing, medical, or any other allowances) • The value of any benefits in kind provided by/on behalf of the employer to the em- ployee • Amount of private/personal expenditure discharged or reimbursed by the employer • Employment terminal and retirement benefits • Insurance premiums paid by the employer for the employee and/or his dependants • Payments in respect of change of employment/contract terms • Discounts in shares allotted to an employee and any gain derived on disposal of a right or option to acquire shares under an employee share acquisition scheme Note: It should be noted that all or any of the above in combination comprise employment income. 12.2.2 Benefits in Kind A benefit in kind is the facilitation not by way of cash by an employer to an employee as part of past, present or future employment terms. Such benefits need not have been in the written employment terms. Taxable non-cash employment benefits include: • Private use of an official motor vehicle • Provision of domestic servants and utilities • Meals, refreshment, entertainment • Relief of debt obligations/interest • Provision of property by employer to employee (at no arm's length terms) • Provision of residential accommodation • Any other benefits as determined by the Commissioner General. 12.2.3 Valuation of Benefits in Kind As a general rule, the value of a benefit in kind is the fair market value of the benefit on the date it is taken into account for tax purposes less any amount paid by the employee for the benefit.