Corporate Income Tax
Proposed tax rules on Property Investment Vehicles By Botlhale Mathibe-Joel
Currently, the general legislative treatment of South African property investment vehicles is not in sync with the international treatment of real estate investment trusts (REIT). The long anticipated change to the taxation of South African property investment vehicles has been proposed in the Taxation Laws Amendment Bill, 2012 (Bill). This piece of legislation has been outstanding since the publication of the white paper by the National Treasury in 2008 on the adaptation of the international REIT structure in the South African Environment.
REITs in the international sense do not exist in South Africa and currently property investment vehicles are in the form of property unit trusts (PUT) and property loan stock companies (variable loan stock companies) (PLS).
A PLS, which has proved to be the popular structure, is regulated by the Companies Act No. 71 of 2008. A PUT is governed by a trust deed and managed by an external company. In addition, a PUT is regulated by the Financial Services Board through the Collective Investment Scheme Control Act No. 45 of 2002.
An investor in a PLS company holds equity and a debenture (linked unit) whilst an investor in a PUT acquires a unit. Currently, there are inconsistencies in the tax treatment of a PLS and A PUT. The conduit principle is applied in relation to a PUT in that the investor in a unit is taxed on distributions (rental income) made by the PUT as ordinary revenue. Any amounts which are not distributed by the PUT within in a period of 12 months will be taxable in the hands of the PUT at a rate of 40%. A PUT is not subject to capital gains tax. Contrary to this, any dividends declared and paid by a PLS will be subject to dividends tax at a withholding rate of 15%. A PLS is subject to capital gains tax at an effective rate of 18.66%. A significant portion of distributions made by a PLS to an investor is typically in a form of interest with the result that the PLS has the benefit of deducting this from its income. The National Treasury frowns upon this as, according the Explanatory Memorandum (EM) to the Bill; it regards the interest to be more akin to a dividend which is not deductible for tax purposes. The National Treasury is also concerned about the “excessive level of interest”.
It is proposed that the existing PUT and PLS investment vehicles are listed and classified by the Johannesburg Stock Exchange (JSE) as RETs, a unified tax regime for PUT and PLS be implemented to level the playing field and to bring the treatment in sync with international practice. The following financial regulations criteria must be met in order for the PUT or PLS to qualify as REITS:
- The REIT must have a minimum amount of assets comprising of interest in immovable property, interest in a lease relating to immovable property, interest in a property subsidiary or holdings in another REIT;
- The REIT must solely invest in immovable property assets and collateral debt instruments and hedges used to reduce the risk associated with property-related loans;
- The REIT must distribute most of its profits annually; and
- The REIT must not have excessive borrowings in relation to the total gross asset value of immovable property held by it.
Under the proposed unified tax regime the REIT will be exempt from capital gains tax and only the holder of shares or participatory interest will be subject to tax, i.e. capital gains tax. Receipts and accruals in respect of financial instruments (dividends, disposal of shares, bonds, derivative income, etc) will be taxed as ordinary income. These receipts will be subject to tax without regard to any exemptions which may apply. The REIT will enjoy a full deduction from ordinary revenue of distributions made provided the distribution arises from income and receipts earned by the REIT within the current or the immediate prior year of assessment. In addition the deduction will be allowed to the extent that the total gross rentals received or accrued by the REIT is at least to 75% of total gross receipts or accrual. The distribution will be treated as a dividend if the REIT fails to comply with the above.
The National Treasury has not offered any transitional or conversion rules but one hopes that this will also be introduced to effect a smooth conversion of the existing PUT and PLS into a REIT.
Discussions on how to deal with the issue of unlisted property investment vehicles are still continuing. The effective date for these proposed amendments has not yet been set.
