REIT tax rules
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 representing a qualifying distribution during a year of assessment.
However, 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, capital gains tax 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.
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.
As outlined in the Draft Taxation Laws Amendment Bill 2013, released South Africa’s National Treasury in July 2013, there are proposals that would:
- Amend and refine certain REIT-related definitions
- Provide that a dividend from a REIT (or a qualifying distribution from a controlled company) would 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
- Clarify the timing of the “qualifying distribution”
- Clarify the depreciation allowance rules
- Clarify that the capital gains exemption would 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
- Provide that the REIT or controlled company’s year of assessment ends on the day when the company ceases to be a REIT or controlled company, for example, when the REIT no longer adheres to the JSE rules
- Provide the cancellation of debentures would not have any income tax or capital gains tax effect in terms of the rules relating to the reduction or cancellation of debt
The proposed changes, coming shortly after enactment of REIT law in South Africa, reflect a degree of commitment of the tax authorities in providing that the tax dispensation for South African REITs is suitable for its intended purpose.
Read an August 2013 blog posting by the KPMG member firm in South Africa: The tax implications of South African REITs