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REIT investments and tax

How your listed property holding will be taxed.

CAPE TOWN – By the middle of this year, most of South Africa’s listed property companies had converted themselves into real estate investment trusts (REITs) under legislation adopted in 2013. This brings the sector in line with global standards.

One of the most important things that REIT legislation changes is the way that these companies are taxed. This is important for investors to understand, because it also alters the way that they are taxed on the distributions such companies pay out.

“Interest distributions by a REIT (or a controlled property company) to a South African resident are re-characterised as taxable dividends,” explains Shelly Moreno, head of tax at Harvard House. “This is a new classification, previously treated as interest.”

There are two key parts to this. Firstly, it means that the 15% dividends withholding tax that is applied to dividends paid out by ordinary shares does not apply to distributions from REITs.

Instead they are included in the recipient’s taxable income with no exemptions. So the full amount is taxed at the shareholder’s normal tax rate.

The reason for this is that REITs are entitled to deduct for their income tax purposes all distributions that they pay out to shareholders. So this encourages them to pay out all of their income so that they pay no tax at all.

“The effect is that the tax on the net income of the REIT is ultimately borne by the investor,” Moreno says.

So even though distributions from REITs may actually be taxed more aggressively than dividends from other listed companies, their unit holders should ultimately benefit by sharing in a greater portion of profits.

For those listed property companies, such as Attacq, that have not adopted REIT status, the tax on distributions is calculated slightly differently. Such distributions have both an interest and a dividend component, with each part taxed as such in the hands of the unit holder.

“For listed property shares that have not been reclassified as REITs, interest earned is taxed at the marginal rate after the normal interest exemptions of R23 800 for individuals below 65 years of age and R34 500 for individuals above 65,” Moreno says. “The small portion of local dividends attract the 15% dividends withholding tax, while the net local dividends are exempt from income tax.”

When selling any listed property investment, regardless of whether it is a REIT or not, the gain is taxed in the same way as for all shares. In most cases that means that the profit from the sale of units held for longer than three years will be considered capital gain, while profits from those held for shorter periods will be treated as income.

The above holds true for all tax payers considered as resident in South Africa. For non-residents, however, things are looked at differently.

“Where a non-resident receives a REIT distribution, the dividend received is still exempt from income tax but 15% DWT is levied, subject to any double taxation agreement reductions that may be applicable,” Moreno explains. “The non-resident taxpayer is not taxed on the capital gain when units are sold, as SARS would have deemed the taxpayer to have sold all shares when the taxpayer left South Africa and the taxpayer would have paid a ‘deemed capital gains exit tax’ when becoming non-resident.”

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