Trusts boost lo­cal prop­erty mar­ket

New op­por­tu­ni­ties pro­vided for for­eign in­vest­ment onto the JSE

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - CHRIS SMITH

AT A time when SA ur­gently needs for­eign in­vest­ment, the ad­vent of the coun­try’s Real Es­tate In­vest­ment Trusts (REITs) leg­is­la­tion is a wel­come de­vel­op­ment for the prop­erty mar­ket.

In­vestors in the US, UK and Ja­pan, among oth­ers, know what REITs are and are very com­fort­able with them. Now that SA has REITs too, new op­por­tu­ni­ties have opened up for in­vestors from th­ese coun­tries.

A REIT is de­fined as a res­i­dent South African com­pany listed on the JSE, the shares of which are listed in ac­cor­dance with JSE list­ing re­quire­ments for REITs. One of th­ese re­quire­ments is that 75% of a REIT’s rental and div­i­dend in­come from prop­erty in­vest­ments must be dis­trib­uted di­rectly to its in­vestors.

Since SA’s REITs leg­is­la­tion came into ef­fect on 1 April 2013, there has been a marked up­surge in in­ter­est among po­ten­tial in­vestors, par­tic­u­larly from the US. Many want to test the South African mar­ket. This comes at a good time con­sid­er­ing the lack of growth in our prop­erty mar­ket for the past three years.

REITs are the in­ter­na­tional stan­dard for prop­erty in­vest­ment ve­hi­cles and have ex­isted in the UK and Ja­pan since the early 1980s, and even longer in the US.

The mere fact that SA also has an in­vest­ment mech­a­nism called REITs makes our prop­erty mar­ket, specif­i­cally ex­ist­ing listed prop­erty com­pa­nies, sig­nif­i­cantly more at­trac­tive.

How­ever, the ad­vent of REITs is more than just a cos­metic change. It has also lev­elled the play­ing field in terms of the tax treat­ment of listed prop­erty com­pa­nies in SA. For the first time, we have the same set of rules for ev­ery listed prop­erty com­pany. It is hoped th­ese rules may be ex­tended to un­listed com­pa­nies in the fu­ture.

In terms of in­come tax treat­ment, REITs do not pay cap­i­tal gains tax when they sell shares in other REITS, in con­trolled prop­erty com­pa­nies or if

Prop­erty loan stock com­pa­nies do need to ap­ply to the JSE for REIT sta­tus

they sell im­mov­able prop­erty

Non-res­i­dent in­vestors in SA REITs will be sub­ject to div­i­dend with­hold­ing taxes on dis­tri­bu­tions from the REIT div­i­dends af­ter 1 Jan­uary 2014.

The amount of the div­i­dend with­hold­ing tax may be re­duced by dou­ble tax pro­vi­sions. South African res­i­dent in­vestors in a REIT pay nor­mal in­come tax on in­come they re­ceive from the REIT and cap­i­tal gains tax when they dis­pose of their in­ter­ests in the REIT (if the in­ter­ests are held by them as cap­i­tal as­sets).

Pre­vi­ously, there was dif­fer­en­ti­ated tax treat­ment for the two for­mer types of listed prop­erty com­pa­nies in SA: col­lec­tive in­vest­ment schemes and prop­erty loan stock com­pa­nies.

Col­lec­tive in­vest­ment schemes were sim­i­lar to REITs in that their rental and div­i­dend in­come from prop­erty in­vest­ments flowed di­rectly to their in­vestors. Also, th­ese schemes did not pay cap­i­tal gains tax when the scheme sold shares or prop­erty. In­stead, like REITS, the in­vestors were taxed on the in­come dis­trib­uted to them and the in­vestors paid cap­i­tal gains tax when they dis­posed of their in­ter­ests in the REIT (if the in­ter­ests were held by them as cap­i­tal as­sets).

Prop­erty loan stock com­pa­nies were treated quite dif­fer­ently.

Firstly, they were taxed as nor­mal com­pa­nies, mean­ing they did pay tax when shares or prop­erty were sold.

Se­condly the in­vestors, who held an eq­uity share and a linked deben­ture in the com­pany, were taxed on in­ter­est on the deben­ture.

Hence, the new dis­pen­sa­tion ap­pli- cable to REITs will most likely ben­e­fit th­ese prop­erty loan stock com­pa­nies the most.

Pre­vi­ous de­ferred tax raised due to their prop­erty hold­ings could be re­versed in their an­nual fi­nan­cial state­ments, de­pend­ing on the au­di­tors’ in­ter­pre­ta­tion of the ef­fect of the new REIT leg­is­la­tion and reg­u­la­tions.

Col­lec­tive in­vest­ment schemes in im­mov­able prop­erty are be­ing con­verted to the new REIT for­mat pro­vided they meet the qual­i­fy­ing cri­te­ria.

Prop­erty loan stock com­pa­nies, on the other hand, do need to ap­ply to the JSE for REIT sta­tus.

Prop­erty loan stocks may go through a re­struc­tur­ing process to con­vert their linked units into reg­u­lar shares. For them, it will be im­por­tant to struc­ture the in­vest­ment so that it is tax ef­fi­cient and meets the le­gal re­quire­ments. Con­sid­er­ing the ben­e­fits of be­com­ing a REIT, both from a tax per­spec­tive and the in­creased in­ter­est they are likely to at­tract from in­vestors, this is likely to prove to be worth the ef­fort.

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