GIFTS, DONATIONS,GRANTS - TAXABLE OR NOT? Let's find out...

Gifts are not usually subject to income tax in the recipient’s hands because, generally, they do not have the character of ‘income’. A “gift” refers to a receipt that the giver makes voluntarily i.e., the giver is under no legal obligation to give. Such transfers arise in a wide variety of circumstances. In some circumstances, a gift or an inheritance may be assessable income in the recipient’s hands. The distinction between income and a mere gift received lies in a person’s claim as of right to receive the gift i.e., the receipt of a gift does not give the recipient the right to receive it, and therefore the item cannot be construed as income. Whether a receipt qualifies as income is normally decided from the recipient’s perspective. However, the characterization of a receipt as income must be determined by considering the relationship between the payer or giver, on the one hand, and the recipient, on the other. The motive of the giver or payer, and whether the property was given or an amount was paid voluntarily, is also relevant but not determinative. Moreover, the motive of the payer is only significant to the extent that it bears on the character of the payment in the recipient’s hands.

Broadly, Uganda's Income Tax Act (ITA) is designed to tax “income”. The term “income” does not have a defined meaning in the Act and its meaning is therefore decided from ordinary concepts and usages. Several factors must be weighed up to decide whether an amount is income in a particular case. Some factors may have greater relevance in some cases than in others.

Generally, amounts received by voluntary transfer – either as a gift during the life (inter vivos) of the donor, or by will or intestate succession following the transferor’s death, are broadly excluded from the income tax base under “Exempt Income”. Section 21(1)(j) ITA treats as exempt income of a person (i.e., excludes from taxable income), the value of any property acquired by gift, bequest, devise, or inheritance. The exclusion is based on the premise that this is merely a redistribution by a donor or deceased’s after-tax income. Under tax law, the giver of such a gift cannot claim a deduction for the value of the gift unless the gift is given for charitable purposes.?

Whether a gift is assessable to the recipient must be objectively decided on a case-by-case basis, considering all the circumstances of how and why the gift was made. Each gift must be considered on its own facts and to qualify for exemption, the gift or inheritance should not be capable of being characterised as either business, employment, or property income. The recipient’s tax base in the transferred or inherited property is generally the fair market value of the property. However, the exclusion for gifts and inheritances does not extend to income earned on the transferred property. Any income generated from the property will be taxed to the recipient.

The ITA provides the following characterization for the tax treatment of gifts:

The value of any gift is included in the business income of a person under section 18(1)(e) if it has been derived by the person in the course, or by virtue, of a past, present, or prospective business relationship. The following factors could support a view that a gift is income of a business:

1. Where the gift or payment can be attributed to the activities or specific work the recipient has carried out.
2. If the payer has an interest in the business or the activity continuing and makes the payment with the intent of helping the business or activity.
3. The payer and recipient are both carrying on a business or profit-making activity.
4. The recipient cannot continue to carry on the activity without the gift or payment.
5. The recipient is not a charity.

The value of any gift is included in the employment income of a person under section 19(1)(b) if it is a benefit, advantage or facility granted by an employer to an employee in respect of past, present or future employment relationship. When deciding whether a receipt of a gift is employment income of the person receiving the gift, the following are some factors that could support a conclusion that a gift is employment income:

1. ?The gift or payment reflects the extent of any services provided.
2. The gift or payment is made in anticipation of future services or to encourage further efforts by employees.
3. The recipient’s employment agreement contemplates the gift or payment.
4. The gift or payment has recurred or it is foreseeable that it will recur, rather than being a one-off payment.
5. The gift or payment is related to duties that are expected of the employee.
6. The gift or payment is commonplace as a matter of practice in the occupation, profession or industry.

The value of a gift is included in the property income of a person under section 20(1)(b) if it is derived by the person in connection with the provision, use or exploitation of property.?

Based on the above law, in order to be included in business, employment or property income, a gift must have a sufficient nexus to the relevant earning activity. Accordingly, a purely windfall gain is not included in business, employment or property income and is treated as exempt income. However, any voluntary payments designed in such a way as to augment the consideration payable for goods or services whether past, present or future, are taxable as business, employment or property income. The following guiding principles have emerged from foreign jurisprudence:

• Voluntary payments or gifts are not taxable unless they can be attached to a pre-existing source of income.
• The existence of a trading relationship between payer and recipient is not necessary in order to stamp a payment as a ‘trading receipt’.
• It is the character of the payment in the recipient’s hands that determines whether it is taxable, but the payer’s purpose in making the payment may be evidence of that character.
• If the character in the recipient’s hands is that of a payment made in order that the money may be used in the recipient’s business, to supplement trading or other business receipts and to enable the recipient to carry on business, or otherwise to preserve and maintain trading stability and solvency, then it will be a taxable trading receipt.
• It will also be a taxable trading receipt if it is recompense for services etc provided that have not otherwise been adequately remunerated, or to make good a loss of profit.

Excerpt from UNDERSTANDING TAX LAW AND TAXATION IN UGANDA: Rules, Principles and Practice.