S.Africa: A recap of the REIT provisions and the latest amendments thereto

A recap of the REIT provisions and the latest amendments thereto

24 February 2015

Author: Toinette Beckert (ENSafrica)

The provisions in the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act No. 58 of 1962 (“the Act”) pertaining to the taxation of Real Estate Investment TrustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. (“REITs”) are contained in section 25BB and were introduced into the Act with effect from 1 April 2013.

Deduction of “qualifying distributions”

A REIT is a resident company which shares are listed on an exchange as shares in a REIT (as defined in the JSE Listings Requirements). Essentially, section 25BB allows for a “qualifying distribution” to be made by a REIT or a controlled company (a company that is a subsidiary of a REIT) for which the REIT or controlled company (that is a resident) gets a deduction from its income for the year of assessment to which that qualifying distribution relates.

Broadly speaking, a “qualifying distribution” means dividends paid or payable by the REIT or a controlled company or interest incurred in respect of debentures that form part of a linked unit in that company where 75{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the gross incomeGross Income is a comprehensive term used to define the total income received by an individual or entity before any deductions, exemptions, or allowances. The concept is central to the calculation of taxable income across different tax jurisdictions. It encompasses a broad range of income sources, such as wages, salaries, business income, dividends, interest, rental income, and other forms of... of that company consists of “rental income”. “Rental income” is amounts received or accrued in respect of immovable property, a dividend from a REIT, a qualifying distribution from a controlled company or a dividend or foreign dividend from a company that is a “property company”.

A “property company” is a company in which 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} or more of the equity shares or linked units are held by a REIT or a controlled company and of which, at the end of the year of assessment, 80{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} or more of the value of the assets reflected in the financial statements for the previous year of assessment, is directly or indirectly attributable to immovable property. The definition of “property company” previously required that the financial statements must have been prepared in accordance with the Companies Act No. 71 of 2008 (“the Companies Act”). There has been a recent amendment to the definition of “property company” in the Taxation LawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... Amendment Act No.43 of 2014 (“TLAA 2014”) which allows the financial statements to also be prepared in terms of International Financial Reporting Standards (“IFRS”). The reason for the amendment is that foreign companies will not prepare annual financial statements in accordance with the South African Companies Act since this act does not apply to a foreign company. Accordingly, all companies incorporated in foreign jurisdictions were previously excluded from the definition of “property company”. The amendment now makes it clear that a foreign dividend from a foreign company preparing its financial statements in accordance with IFRS should also be from a “property company” (provided the other requirements of the definition of “property company” are complied with) and therefore constitute “rental income” in determining whether a REIT or controlled company can make qualifying distributions.

The deduction that may be made by a REIT or a controlled company in respect of qualifying distributions may not exceed the taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... for that year of assessment of the REIT or controlled company before taking into account any deduction in terms of section 25BB, any assessed loss brought forward and the amount of taxable capital gain included in taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,....

Capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... of a REIT or controlled companies

In determining the aggregate capital gain or aggregate capital loss of a company that is a REIT or a controlled company on the last day of a year of assessment, any capital gain or capital loss determined in respect of the disposal of:

immovable property of a company that is a REIT or a controlled company at the time of disposal;
a share or a linked unit in a company that is a REIT at the time of that disposal; or
a share or a linked unit in a company that is a property company at the time of that disposal,

must be disregarded.

The requirement that the company must be a REIT or a controlled company at the time of disposal was introduced by the TLAA 2014 with effect from its promulgation (20 January 2015), and is applicable in respect of years of assessment ending on or thereafter. Previously, this requirement was not included and therefore a REIT or controlled only had to be a REIT or controlled company at the end of the year of assessment to qualify for the relief.

Further specific provisions

There are a number of further specific provisions dealing with the taxation of REITs and controlled companies, including, inter alia, provisions dealing with the receipt or accruals by a REIT or a controlled company in respect of a financial instrument, the disallowance of deductions in respect of immovable property and specific rules in respect of the receipt or accrual of amounts of interest in respect of debentures forming part of a linked unit.

Implications for investors

On the investor side, the dividend received by or accrued to the investor in the REIT will, however, not be exempt from income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... in terms of the ordinary dividend exemption provisions. Any amount of interest received by or accrued to an investor in respect of a debenture forming part of a linked unit in a REIT or controlled company must be deemed to be a dividend received by or accrued to that investor. The provision dealing with the receipt or accrual of interest previously referred to a linked unit in “a company”. The TLAA 2014 introduced the amendments to clarify that what is envisaged is a linked unit in a REIT or a controlled company. This amendment is deemed to have come into operation on 1 April 2013, and applies in respect of years of assessment commencing on or after that date.

Accordingly, the investor will be taxed on the distributions received or accrued from the REIT or controlled company.

*For clarity, the term Double Tax TreatyA Double Taxation AgreementA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... (DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and...), also known as a Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Treaty (or a Tax TreatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and...), is an international

A recap of the REIT provisions and the latest amendments thereto

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