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New REIT Regime for International Investment

South Africa

The National Treasury recently released the Draft Taxations Laws Amendment Bill, 2012 (DTLAB). One of the significant new proposals of the DTLAB is the introduction of a South African Real Estate Investment Trust (REIT) tax dispensation which will consolidate the existing property loan stock (PLS) and property unit trust (PUT) structures. The REIT regime is set to provide certainty in respect of the taxation of the current South African property investment structures and to bring such structures on par with leading international norms. Taxand South Africa discusses how rental income in the country is becoming more internationally friendly.

Generally, a REIT structure is a tax regime that provides "flow though" on a pre-tax basis of the net property income of a REIT (after expenses and interest to third party funders, such as banks) to investors. The PUT and PLS therefore operate in the same space as a REIT and are currently the two main types of listed property investment schemes in South Africa. The REIT structure exists in countries like the US, the UK, Australia, Japan and Singapore and is becoming an international standard as property investment globalises.

The net effect of the PUT, PLS and REIT is that rental income received or accrued is effectively only taxed in the hands of the investor. However, although the South African property sector has delivered favourable forward yields compared to global standards in recent years, neither the PLS or PUT offers international investors the uniformity and simplicity to facilitate international investment. For this reason the Property Loan Stock Association ("PLSA") has spearheaded the establishment of a "best-of-breed" REIT vehicle to encourage foreign investment into the South African property sector.

The proposed REIT regime is the result of an ongoing negotiation process between the National Treasury, the South African Revenue Service, the PLSA, JSE and various lawyers and tax advisors. One particular proposal by the PLSA was that both listed and unlisted REITs should be accommodated. Another prosposal was that any capital gain or capital loss determined in respect of the disposal of an asset by a REIT must be disregarded in determining the aggregate capital gain or capital loss of that REIT for capital gains tax ("CGT") purposes. The REIT will accordingly be exempt from CGT. This is a significant concession from Treasury.

Discover more: The proposed South African reit regime - the "best of breeds"?

Taxand's Take

In order to benefit from the preferential tax treatment of REITs, PLS companies may have to amend their Memoranda of Incorporation to convert to REITs. Careful consideration of the CGT implications for the holders of linked units should be had, to the extent that the amendment to their rights constitutes a conversion or variation. The current proposed provisions do not specifically deal with a conversion of a PLS into a REIT and presumably the legislature will grant a specific exemption to unit holders in this regard.

Your Taxand contacts for further queries are:
Gary Vogelman
T. +27 21 410 2500

Janel Strauss
T. +27 21 410 2500

Taxand's Take Author