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REIT Tax Proposals For Property Sector
Real Estate Investment Trust (REIT) tax proposals have been introduced as part of the recent Draft Taxation Laws Amendment Bill. The proposals seek to standardise the tax treatment of Property Unit Trusts (PUT) and Property Loan Stock (PLS) companies. Taxand South Africa explains the changes the REIT will bring to the property sector.
REIT legislation has been implemented in numerous countries across the world and the South African legislation broadly reflects international policy in this regard. The objective of the REIT is to provide investors with a steady rental stream that acts as a substitute for interest income whilst also providing capital growth stemming from the underlying properties.
Key areas covered by the REIT are:
- Any amount received by or accrued to a South African tax resident REIT in respect of a financial instrument (e.g. loans or shares) must be deemed to be taxable income.
- Any rental distribution made by a REIT during a year of assessment to a shareholder will be deemed to be a tax deductible expense and will be regarded as gross income from a source in South Africa in the hands of the recipient.
- All distributions by a REIT that do not qualify as a rental distribution will be regarded as a dividend. No tax deduction will be available and dividends tax will be payable.
The impact of the new legislation is far reaching for property investors and many aspects of these proposals require careful consideration. An area of particular concern relates to foreign investment in property funds. It is unlikely in most circumstances that South African property companies will be able to regard a foreign property fund in which it invests as a property subsidiary (control more than 50% of voting right). As such the foreign entity cannot be a REIT and income received from these funds do not count towards the 75% threshold for qualifying rental distributions.