Real Estate Investment Trust (REIT): Effective date of income tax legislation
By Wendy Gardner
In South Africa, two main types of property investment vehicles exist –Property Unit Trust (PUT) and Property Loan Stock (PLS). Both property investment schemes are listed on the JSE and are also regulated by JSE rules.
To address the current anomalies between the taxation of PUTs and PLSs, National Treasury announced on 25 October 2012 that a unified approach to the taxation of property investment vehicles would be introduced. This was achieved, with the introduction of tax legislation recognising a REIT as a specific type of taxpayer. Section 25BB, that governs the taxation of REITs, was inserted with effect from 1 April 2013 and is applicable in respect of tax years commencing on or after that date.
Section 25BB of the Act in essence provides for the flow-through principle to apply to a REIT in such a way that income and capital gains will be taxed solely in the hands of the investor and not in the hands of the REIT, provided all the requirements of the section are met.
In order to qualify as a REIT for tax purposes, a company must be a resident and its shares must be listed on the JSE as shares in a REIT.
The JSE is currently amending its listing requirements to create a category for the listing of REIT securities and has announced that property companies currently listed on the JSE as either PLSs or PUTs will have the option to convert to a REIT structure and any new listings in this sector will have to comply with JSE REIT listing requirements.
To the extent that the date of conversion of an existing PLS to a REIT on the JSE is delayed until after the first day of the company’s tax year commencing on or after 1 April 2013, the question that arises is whether the company (and its shareholders) will nonetheless be subject to the provisions of section 25BB of the Act and hence taxable as a REIT from the first day of its tax year commencing on or after 1 April 2013, whether it will be taxable as a REIT from the date of its actual conversion to a REIT on the JSE or whether it will only be taxable as a REIT from the first day of the following tax year (provided it has converted to a REIT on the JSE by that date).
Section 25BB of the Act does not expressly require a company to have been a REIT for a full year of assessment, or on any particular day of the year, for its provisions to apply (although such requirements are common in the tax legislation in similar circumstances). Section 25BB of the Act simply applies to qualifying companies and its shareholders in respect of tax years commencing on or after 1 April 2013. It is notable, also, that those provisions of the Act which applied to PUTs are deleted with effect from the same tax year, so that in the case of those entities the previous dispensation would cease to apply and not be replaced by section 25BB of the Act if no conversion option is exercised. A PLS, on the other hand, would continue to rely on the general provisions of the Act to regulate its tax treatment, if it does not exercise a conversion option. This would suggest, in our opinion, that the intention is for section 25BB to apply from the commencement of the first day of its tax year commencing on or after 1 April 2013 and there to be no ‘gap’, if a company converts to a REIT on the JSE after this date.
A further argument is that the test is essentially a practical one; namely, was the company concerned listed on the JSE on 1 April 2013 and did it comply, at that date, with the requirements of the JSE to be recognized as a REIT. If both answers are affirmative, then for tax purposes the company is a REIT on the first day of its tax year commencing on or after 1 April 2013, whether or not it has yet made application to the JSE (but provided it does apply at some stage), because the definition of REIT in section 1 requires the company to be listed as a REIT under the JSE listing requirements and these requirements arguably incorporate the JSE effective registration date, being we understand the first day of the financial year of the company commencing on or after 1 April 2013. The exact terms of the JSE rules should be examined to ascertain whether the reference to that date is structurally part of the Listing Requirements.
Neither argument, however, is certain. In particular, the status of companies electing to only convert in a subsequent tax year (i.e. commencing in 2014 or later) is unclear. It is possible that the JSE rules applicable to such a late conversion might assist in interpretation, but even so it is possible that the correct interpretation of a 2014 conversion is that REIT tax status would commence only from the date of conversion. If that is so, it casts some doubt on a 2013 conversion being tax-effective from the commencement of the tax year on or after 1 April 2013.
Nonetheless, taking all the above into account, should an existing PLS convert to a REIT on the JSE after the first day of its tax year commencing on or after 1 April 2013, for the reasons advanced above it is arguable that the PLS should be taxable as a REIT with effect from the first day of its tax year commencing on or after 1 April 2013 for the entire 2014 year of assessment. Alternatively, the PLS should be taxable as a REIT with effect from the date of registration on the JSE for the balance of the 2014 year of assessment. We do not consider it possible to interpret section 25BB in such a way that the PLS will only be taxable as REIT with effect from the beginning of the 2015 tax year (i.e. with effect from the first day of the following financial year.
We understand that National Treasury is to address this matter in the next round of tax legislation expected in July 2013.