South Africa: REITS: Implementation Issues

Last Updated: 5 June 2013
Article by Alexa Muller and Gary Vogelman

Most Read Contributor in South Africa, September 2016

The Real Estate Investment Trust ("REIT") regime is set to usher in a new era for the listed property sector by affording certain tax advantages to qualifying entities and providing certainty in respect of the tax treatment where certainty previously did not exist in the context of property loan stock companies. However, as the legislation is new and untested, uncertainties and anomalies exist, some of which are discussed below.

A "REIT" is defined in section 1 of the Income Tax Act No. 58 of 1962 ("the Income Tax Act") as, broadly speaking, a company that is a resident and the shares of which are listed on an exchange as shares in a REIT as defined in the JSE Listings Requirements.

Taxation of a REIT

  • A REIT is entitled to deduct from its income the amount of any "qualifying distribution" incurred during that year of assessment by that REIT. "Qualifying distribution" is defined to include (broadly speaking), any dividend declared or interest incurred in respect of a debenture forming part of a property linked unit by a REIT or a controlled property company ("CPC"), during a year of assessment, if more than 75% of the gross income received by or accrued to such REIT or CPC until the date of declaration consists of rental income. A CPC is defined as "a company that is a subsidiary, as defined in International Financial Reporting Standard 10 of IFRS, of a REIT". IFRS defines "subsidiary" as: "an entity that is controlled by another entity".
  • Any amount received by or accrued to a REIT or a CPC during a year of assessment in respect of a financial instrument (other than, most relevantly, a share in a REIT or a CPC) must be deemed to be an amount that is not of a capital nature and be included in the income of that REIT or CPC for that year of assessment.
  • A REIT or a CPC may not deduct by way of an allowance any amount in respect of immovable property in terms of certain provisions of the Income Tax Act.
  • The most significant benefit afforded to companies that qualify to be listed as a REIT is that in determining the capital gain or capital loss of a REIT, any capital gain or loss in respect of the disposal of, most relevantly, immovable property or a share in a CPC must be disregarded.

Taxation of investors

South African resident natural persons

A South African tax resident natural person investing in a REIT will be subject to income tax on dividends received by or accrued from a REIT at a maximum rate of 40%. Such person will, however, be exempt from dividends tax in respect of such dividend. Interest received by or accrued to a person in respect of a debenture forming part of a property linked unit of a REIT or a CPC held by that person will be deemed to be a dividend and will accordingly be subject to income tax in the hands of such person (but exempt from dividends tax).

South African resident trusts

A South African trust investing in a REIT would be liable to income tax in respect of dividends received or accrued from a REIT at a rate of 40%. Alternatively, such income may be vested in its beneficiaries, in which event the beneficiaries would be subject to income tax thereon (in accordance with the "conduit principle"). The trust (or, if relevant, the beneficiary of the trust) will, however, be exempt from dividends tax in respect of such dividend.

Foreign natural persons and trusts

Dividends received by or accrued to a foreign investor prior to 1 January 2014 from a REIT or a CPC will be exempt from dividends tax and South African income tax. In respect of dividends received by or accrued to foreign investors subsequent to 1 January 2014, such dividends will be subject to dividends tax at a rate of 15% of the amount of the dividend paid (subject to any reduction in such rate by virtue of the application of a Double Tax Agreement entered into by South Africa) but will be exempt from South African income tax.

Despite foreign investors being exempt from income tax in respect of distributions received by or accrued from REITs or CPCs, such distributions would constitute South African sourced income (i.e. gross income) in their hands. As a result, the investment by foreign investors in a South African REIT or CPC may give rise to unwanted compliance burdens in South Africa (for example: registration as a taxpayer in South Africa, the submission of annual tax returns etc.)


  • In accordance with the JSE Listings Requirements, a REIT will be required to distribute 75% of its "distributable profits".  "Distributable profits" is defined in the JSE Listings Requirements as gross income, as defined in the Income Tax Act, less deductions and allowances that are permitted to be deducted by a REIT in terms of the Income Tax Act, other than the qualifying distribution as defined in section 25BB of the Income Tax Act. Property companies often have assessed losses derived from "pre-production interest", property allowances or the interest costs associated with high gearing. It is not clear from the REIT Listings Requirements whether such losses may also be taken into account in determining the "distributable profits" of a REIT for the applicable year.
  • The REIT legislation may give rise to tax exposure for a property company to the extent that it enters into any hedging arrangements, for example, interest rate swaps in respect of its funding. Ordinarily, any gains in respect of the realisation of such hedges will not generally be distributed as such amounts will be set off against the "matching" losses which should be incurred on the realisation of the associated loan funding. In terms of the REIT legislation any hedging gains will be considered to be income and may have to be distributed by the REIT in order to comply with the requirement that at least 75% of distributable profits must be distributed.
  • The REIT legislation has the result that dividends received by a REIT or a CPC on shares other than shares in a CPC or REIT, will be included in the income of the REIT. In order to avoid paying tax on such amounts, the REIT will have to distribute such amounts to its shareholders. The shareholders will be subject to income tax on such distributions (assuming that they are not exempt). In addition, the underlying entities in which the shares are held would in all likelihood have been subject to income tax on the profits which were distributed. As a result, effective double taxation may arise.
  • On the basis of the wording of the REIT legislation, there may be a risk that a buy-back transaction entered into by a REIT or a CPC may give rise to a deduction being denied and the repurchase price being taxed as income in the hands of the shareholders.
  • Should a REIT or a CPC dispose of all of its assets and distribute the profits to its shareholders, it will effectively have the result that the capital gains (which are exempt in the REIT) become subject to income tax in the hands of the non-exempt, resident shareholders. As such, minority shareholders should carefully consider the implications of their "joint venture" shareholders becoming a REIT.
  • If a property company declares a dividend in a year of assessment to its shareholders and then later is taken over by a REIT such that it becomes a CPC, there is a risk on the basis of the current wording of the REIT legislation that the shareholders that received that dividend would be subject to income tax on such dividend, despite such company only becoming a CPC after the dividend was received.

We understand that amendments to the legislation will be proposed to deal with certain of these anomalies.


Despite the tax benefits which may be enjoyed by a property company and its shareholders upon the listing of such property company as a REIT, it is highly recommended that any company wishing to list as a REIT or a joint venture company where a shareholder is about to become a REIT obtain detailed tax advice in relation to the tax implications which may arise in this regard and obtain an understanding of the potentially relevant anomalies which may arise in respect of the implementation of such listing as a REIT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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