In its Tax Amendment Bill published last week, National Treasury proposes South Africa's adoption of the internationally recognised Real Estate Investment Trust (REIT) structure for financial regulation and tax purposes. This will bring the country in line with international publicly traded real estate investments and create greater investor certainty.
PLSA REIT committee chairman and executive director of Growthpoint Properties, Estienne de Klerk
The bill includes proposals for creating South Africa's REIT tax dispensation. The suggested REIT structure will encompass both the similar existing local structures, property loan stocks (PLS) and property unit trusts (PUT).
The Property Loan Stock Association (PLSA) has spearheaded the initiative to introduce a best of breed REIT in South Africa and this proposed tax legislation follows five years of consultation with National Treasury.
Estienne de Klerk, PLSA REIT committee chairman and executive director of Growthpoint Properties, says, "National Treasury has applied itself fully to understanding the fundamentals and nuances of the South African listed property sector. This is reflected in the positive proposals put forward for South Africa's REIT tax framework. With the National Treasury, the industry will continue its discussions with the JSE and the Financial Services Board (FSB) to finalise regulatory requirements. We hope to do this swiftly, to allow National Treasury to complete all the tax amendments."
De Klerk expects that investors will welcome South Africa's first REITs in early 2013.
National Treasury's proposed tax framework provides certainty on SA property investment companies' taxation. It brings both local structures in line with each other and in line with leading international structures.
De Klerk explains that while the proposed tax framework allows the distinct foundations of PLS and PUT, both are treated equally under the tabled REIT tax dispensation.
For PLS, it proposes free entry to the REIT structure. REITs will be exempt from capital gains tax on disposals of investment properties, reflecting the reality that trading in properties is not material for REITs, which undertake long-term property investments for rental income and capital growth.
The draft tax law is the basis for ending the complicated loan stock structure - units indivisibly traded on the JSE comprising debentures stapled to shares. This means that REIT distributions made to unit holders of converting PLS will now be tax-deductible dividends, taxed in investors' hands at their applicable rates. The planned new structure will also be free from dividend withholding tax.REIT requirements
For REITs and PUT, the suggested tax framework grants reorganisation rollover relief for merger and entity acquisition transactions. This tax framework will be applied to all JSE-listed companies, present and future, that qualify as REITs.
To list as a REIT, National Treasury needs companies to meet four basic measures. They must have a minimum gross holding of property assets. They should invest in immovable property, direct and indirect. They must not have excessive borrowing in relation to total gross assets. Finally, they have to distribute a minimum amount of their profits yearly.
De Klerk adds, "The levels for each requirement have yet to be finalised. They are expected to be a minimum property holding of R300 million, 60% gearing and around 70% of distributable profits, taking cognisance of the directors' responsibility to ensure the solvency of the entity post the distribution."Straightforward process
De Klerk notes that National Treasury's proposed process to create a REIT is commendably straightforward.
PLS opting to convert will adopt a standard memorandum of incorporation including the four criteria, once getting approval from investors. PUT will include the criteria in their trust deed. Both must meet all the listing requirements of the JSE to qualify as a REIT on the bourse, and thus access the REIT tax dispensation. Converting PLS company directors will be responsible for ongoing compliance with the JSE and PUT trustees will continue to report to the FSB.
For distributions to be fully deductible from a REITs' ordinary revenue, the tabled tax framework says they must stem from distributable income earned in the REIT's current or immediately prior financial year. Further 75% or more of total gross receipts and accruals must be derived from rentals, as broadly defined. The definition of rentals will include revenue from direct and indirect local or international property holdings but will exclude interest earned and development profit.
While tax certainty is the largest advantage for the sector and its investors, de Klerk points out that other benefits will flow through. This includes the increased access to global investors with a recognised REIT structure.
"The sector will become eligible for inclusion in various global REIT indices. International flows from retail and institutional investors will more readily be able to find investment into SA REIT counters. This could improve liquidity and provide a broader investor base for pricing," concludes de Klerk.