For many years investment in immovable property has been a very lucrative form of passive investment in South Africa, particularly when comparing the South African property market with countries like the US or Europe. Property investment vehicles have facilitated such investment into multiple and/or high value properties for a wide range of investors. Abroad, investment opportunities into such property vehicles are given tax certainty through a special tax dispensation for any entities that qualifies as a Real Estate Investment Trust ("REIT"). The principle of the tax dispensation is that the investors should be taxed as if they are direct investors in the immovable property albeit that they collectively invest through the REIT. However, after many years of debate, South Africa has only recently followed suit with a formalised approach in respect of REITs.

REIT tax legislation was introduced for the first time in South Africa for years of assessment commencing on or after 1 April 2013.

Prior to this, the Property Unit Trust ("PUT") and Property Loan Stock ("PLS") companies operated as immovable property investment vehicles in South Africa in a similar manner as the internationally known REITs. However, from an international perspective, the PUT and PLS were not generally recognised property investment vehicles. Foreign investors appeared to be hesitant to invest in these property vehicles due to the inconsistent tax treatment between them. This was mainly as a result of the difference in legal form between the PUT (a trust) and PLS (a company) and the difference in governing regulatory legislation. In addition, there was no certainty for the tax treatment of PLS's.

Therefore, there was a need, in South Africa, for a suitable property investment vehicle, with local regulations which are in line with the international standards for REITs and, therefore, easily understood by both local and foreign investors. REIT tax legislation was introduced into the South African Income Tax Act in 2012 in order to create a unified system for both the PUT and PLS regimes. The purpose of the REIT tax legislation was to provide investors with tax certainty in order to incentivise the use of property investment companies, in line with international principles.

REIT tax legislation from 1 April 2013

The REIT tax legislation is now a tax dispensation which contains some very attractive aspects for the taxation of qualifying South African property investment vehicles. It formally brings them in line with international norms and attempts to achieve the tax principle of taxing the investor in a manner similar to the position had the investment been direct.

To qualify for the REIT dispensation, a company must be tax resident in South Africa and its shares must be listed as shares in a REIT in terms of the JSE listing requirements.

Below, the specific REIT dispensation, available to South African property investment vehicles is summarised:

Entities covered

The South African tax legislation applicable to REITs currently covers primarily the JSE listed property investment. In addition, the legislation applies to controlled property companies in relation to a company which is classified by the JSE as a REIT. They are essentially subsidiaries of a REIT.

Taxation of a distribution in the hands of the REIT

For purposes of determining its own taxable income, a REIT (or controlled property company in relation to a REIT) may deduct from its gross income amounts which represent any qualifying distribution during a year of assessment. A qualifying distribution consists of certain dividends declared or interest incurred (in respect of a debenture forming part of a property linked unit) during a year of assessment, if more than 75% of its gross income in the preceding year of assessment consisted of rental income. Where the current year of assessment is the REIT's first year of assessment, the rental portion of the gross income is to be evaluated (75% requirement) during the current year of assessment.

It should be noted, however, that a REIT (or controlled property company in relation to a REIT) may not create an assessed loss from the deduction of the qualifying distribution deduction.  

Capital allowances and CGT exemption

A REIT (or controlled property company in relation to a REIT) is exempt from capital gains tax (CGT) in respect of the disposal of its immovable property, shares in another REIT or shares in a controlled property company. The holder of the REIT share will only pay CGT when the REIT share is sold. It should be noted that the REIT may also not claim capital allowances (depreciation) on the cost of the immovable property it holds, for purposes of determining its own taxable income.

Recharacterisation of interest distributions

Interest distributions by a REIT (or a controlled property company) payable to South African resident investors are recharacterised as taxable dividends (ie the normal tax exemption for dividends does not apply), but dividends withholding taxes will not apply. However, where the recipient is a non-resident investor, the dividend will remain exempt from income tax. As from 1 January 2014, foreign investors will be subject to the dividends withholding tax (subject to any DTA reductions, if applicable).

Thus, the tax on the net income of the REIT is ultimately borne by the investor, in line with the principle. However, the detailed legislation was not as simple as it sounds and a number of technical issues have been identified.

Proposed amendments

On 4 July 2013, National Treasury released the Draft Taxation Laws Amendment Bill 2013, which includes several technical corrections and amendments to the South African REIT legislation which became effective in 2012. It is proposed that these corrections be applied retrospectively (ie for years of assessment commencing on or after 1 April 2013, as if they existed in the legislation introduced next year). Some of the key proposed amendments are set out below:

Terminology and definitions

Certain refinements to the definitions are proposed. An amendment of the definition of "controlled property company" to rather refer to a "controlled company" has been proposed, as the definition itself does not require a property element. Furthermore, it is proposed that a definition of the term "property company" be introduced. (A "property company" means a company where 80% or more of the market value of all the assets of that company are directly or indirectly attributable to immovable property and a REIT or a controlled company holds at least 10% of the equity shares in that company.)

Dividend /qualifying distribution

Another proposal provides that a dividend from a REIT or a qualifying distribution from a controlled company will only be taken into account as rental income if the distributing company qualifies as a REIT or controlled company at the point in time when it made the distribution.

In addition, the proposals provide for a clarification regarding the timing of the "qualifying distribution". It has been proposed that the determination regarding whether the 75% rental income threshold has been achieved will be based on the distribution amount taken into account for financial reporting purposes in respect of the relevant year of assessment. For example, if a distribution is actually paid in 2016, but is taken into account for financial reporting purposes in 2015, the qualifying distribution is based on rental income for 2015, and not 2016. This clarification is helpful, by giving more certainty regarding which year's rental income must be used in determining whether the REIT may qualify for the qualifying distribution deduction.

Further, it has been proposed that a dividend received or accrued from any company that is not a REIT or a controlled company at the time of the distribution must not be taken into account in determining the qualifying distribution. Previously, this could have resulted in a REIT not qualifying for the qualifying distribution deduction where it received, for example, a significant dividend from a company which has not yet received REIT status.

Profit on the disposal of a financial instrument - timing

Under the current REIT legislation, the profit on the disposal of a financial instrument, except the disposal of an interest in a REIT and a controlled company, is considered to constitute ordinary revenue in the hands of the REIT.

It is proposed that, in terms of timing, this rule should only apply to the disposal of a financial instrument by a company that qualifies as a REIT or a controlled company at the end of the relevant year of assessment. This is in line with the legislation's intention to encourage REITs to invest in rental earning property (for the ultimate benefit of the investors) and to discourage REITs to invest largely in financial instruments such as derivatives.

Additionally, it has been proposed that the exception, ie where the disposal relates to an interest in a REIT or a controlled company the profit on the disposal is not considered to be ordinary revenue, applies only if the company in which the interest is disposed of is a REIT or a controlled company at the time of the disposal. Thus, where for example a REIT (company A) disposes of an interest in a controlled company (company B) the profit on the disposal would not be considered to be revenue in the hands of company A if company A still qualifies as a REIT at the end of the relevant year of assessment and company B was a controlled company at the time of disposal.

Depreciation allowances

In terms of the proposals, the current rule that a REIT or controlled company may not claim any capital (depreciation) allowances in respect of immovable property is clarified in that the rule will only apply if it qualifies as a REIT/controlled company on the last day of the year of assessment.

Capital gains exemption – immovable property

Another proposed amendment seeks to clarify that the capital gains exemption will apply to a REIT or a controlled company, if that company qualifies as a REIT or a controlled company on the last day of the company's year of assessment. This capital gains exemption applies in respect of the disposal of immovable property owned or a share in a REIT or property company at the time the share was disposed of.

Tax implications of ceasing to be a REIT

The Income Tax Act does currently not mention the impact on a company where this company ceases to be a REIT or a controlled company.

The proposals contain a rule which provides that the REIT or controlled company's year of assessment will end on the day that the company ceases to be a REIT or controlled company where, for example, the REIT no longer adheres to the JSE rules. Therefore, the following year of assessment will commence on the day immediately after that company ceases to be a REIT or a controlled company. Accordingly, for this new year of assessment, the REIT dispensation will not be available.

Cancellation of debentures

The current legislation also does not provide a rule regarding the treatment, for income tax purposes, of a cancellation of the debenture part of a linked unit by a REIT or a controlled company without compensation. Accordingly, the REIT/controlled company is considered to have capitalised the face value of the debenture to stated capital for accounting purposes (ie the debentures is converted into shares as part of the conversion process from a PLS to a REIT). The proposed amendments specifically provide that that the REIT/controlled company will not be taxed in the case of such cancellation of a debenture.

Thus, in terms of the proposal, the cancellation would not have any income tax or capital gains tax effect in terms of the rules relating to the reduction or cancellation of debt. It has further been proposed that the cancellation of the debenture be disregarded by the debenture holder and that the expenditure incurred by the shareholder of the REIT in respect of the acquisition of the shares be equal to the amount of the expenditure incurred in respect of the acquisition of the linked unit. Therefore, the base cost of the shares in the REIT/controlled company held by the investor (shareholder of the REIT), will in terms of the proposal, remain unchanged for purposes of the conversion process. This is a welcome clarification, as previously there was uncertainty how the REIT and investor should account for this from a tax point of view.


Undoubtedly, the changes proposed by National Treasury following the very recent introduction of REIT legislation to South Africa show some commitment from National Treasury in ensuring the tax dispensation for South African REITs is suitable for its intended purpose.

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.