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 qualify 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.
The introduction of REIT tax legislation
For years of assessment commencing on or after 1 April 2013, REIT tax legislation has been introduced in our country. 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.
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 includes attractive aspects
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.
Keep an eye out for more on REIT Dispensation for South African property investment vehicles…