Section 25BB of the Income Tax Act - Taxation of REIT's - “Real Estate Investment Trust”

This article deals with taxation related to REITs -?“Real Estate Investment Trust” as defined and dealt with in the Income Tax Act, Section 25BB and will be a series of articles related to REIT's.

SARS published a Guidance Note on 05 July 2022 dealing with this matter. It is a lengthy 100 page document; this article will deal with limited aspects only.

REIT's are subject to a number of Acts; this list is given below.

References Acts:

Income Tax Act 58 of 1962

Value-Added Tax Act 89 of 1991

Taxation Laws Amendment Act 20 of 2021

Collective Investment Schemes Control Act

Securities Transfer Tax Act 25 of 2007

Transfer Duty Act 40 of 1949

As this taxation matter is of a complex nature, Section 25BB of the Income Tax is given below in it's entirety.

South African REIT's own several kinds of commercial property such as shopping centres, office buildings, factories, warehouses, hotels, hospitals and residential property in South Africa. REIT's may also invest in property in other countries. The objective of a REIT is to provide investors with steady rental income and capital growth in the underlying properties.

A REIT may be a company as commonly understood or may be deemed to be a company for taxation purposes. A portfolio of a collective investment scheme in property that qualifies as a “REIT” as defined in the listing requirements is deemed to be a “company”.

Both corporate and trust (collective investment schemes in property) REITs that comply with the listing requirements are listed and publicly trade on an exchange. Once the shares in a company or a trust which is deemed to be a company for tax purposes are listed as shares in a “REIT” as defined in the listing requirements, the company or trust will qualify as a REIT for income tax and CGT purposes.

A REIT, and a “controlled company” as defined, are subject to a specific tax regime under section 25BB. In essence, a REIT and a controlled company are granted a deduction, subject to various limitations, for distributions made by it. A resident investor is subject to normal tax on distributions derived from a REIT or controlled company.

By contrast, a non-resident investor is liable for dividends tax (as opposed to normal tax) on such distributions.

A REIT and a controlled company must also consider other taxes that may be applicable and which may or may not be mentioned in the SARS Guidance Note and this article.

Future articles will deal with various types of taxes for REIT's such as foreign tax, normal tax, capital gains tax, dividends tax, VAT, interest and deductions.

Section 25BB of the Income Tax Act -?Taxation of REIT's.

(1) For the purposes of this section:

“controlled company” means a company that is a subsidiary, as defined in IFRS, of a REIT; “property company” means a company:

(a) in which 20 per cent or more of the equity shares or linked units are held by a REIT or a controlled company (whether alone or together with any other company forming part of the same group of companies as that REIT or that controlled company); and

(b) of which at the end of the previous year of assessment 80 per cent or more of the value of the assets, reflected in the annual financial statements prepared in accordance with the Companies Act or IFRS for the previous year of assessment, is directly or indirectly attributable to immovable property;

“qualifying distribution”, in respect of a year of assessment of a company that is a REIT or a controlled company as at the end of a year of assessment, means any dividend (other than a dividend contemplated in paragraph (b) of the definition of “dividend”) paid or payable in respect of an equity share, or interest incurred in respect of a debenture forming part of a linked unit in that company, if the amount thereof is determined with reference to the financial results of that company as reflected in the financial statements prepared for that year of assessment if:

(a) that year of assessment is the first year of assessment and at least 75 per cent of the gross income received by or accrued to a company during that first year of assessment that the company qualifies as a REIT or controlled company, consists of rental income; and

(b) in any other case, at least 75 per cent of the gross income received by or accrued to a REIT or a controlled company in the preceding year of assessment consists of rental income:

Provided that any amount that must be included in the income of the REIT or controlled company in terms of section 9D(2) must not be included in the gross income of the REIT or controlled company in respect of that year of assessment for the purposes of this definition;

"rental income” means an amount calculated in accordance with the formula:

RI = PI + EG

in which:

(a) “RI” represents the amount to be determined;

(b) “PI” represents the aggregate of all amounts received or accrued:

(i) in respect of the use of immovable property, including a penalty or interest in respect of late payment of any such amount;

(ii) as a dividend (other than a dividend contemplated in paragraph (b) of the definition of “dividend”) from a company that is a REIT at the time of the distribution of that dividend;

(iii) as a qualifying distribution from a company that is a controlled company at the time of that distribution;

(iv) as a dividend or foreign dividend from a company that is a property company at the time of that distribution; and

(v) any amount recovered or recouped in terms of section 8(4) in respect of an amount of an allowance previously deducted in terms of section 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex; and

(c) “EG” represents the total of foreign exchange gains contemplated in the definition of “exchange difference” in section 24I(1), determined in terms of that section in respect of the amounts referred to in paragraph (b) that constitute exchange items or any exchange item serving as a hedge in respect of amounts referred to in that paragraph.

(2)(a) There must be deducted from the income for a year of assessment of:

(i) a REIT; or

(ii) a controlled company that is a resident, the amount of any qualifying distribution made by that REIT or that controlled company in respect of that year of assessment if that company is a REIT or a controlled company on the last day of that year of assessment.

(b) The aggregate amount of the deductions contemplated in paragraph (a) may not exceed the taxable income for that year of assessment of that REIT or that controlled company, before taking into account:

(i) any deduction in terms of this subsection;

(ii) any assessed loss brought forward in terms of section 20; and

(iii) the amount of taxable capital gain included in taxable income in terms of section 26A.

(2A) For the purposes of calculating the taxable income in respect of a year of assessment of a REIT or a controlled company as contemplated in subsection (2)(b):

(a) where:

(i) a REIT or a controlled company is a beneficiary of a vesting trust that is not a resident; and

(ii) the trust contemplated in subparagraph (i) is liable for or subject to tax on income in the country in which that trust is established or formed, so much of any amount of tax on income proved to be payable by that trust to the government of a country other than the Republic as is attributable to the interest of that REIT or controlled company in that trust, without any right of recovery of that tax by any person, other than a right of recovery in terms of any entitlement to carry back losses arising during any year of assessment, limited to the amount of taxable income that is attributable to those amounts, must be allowed to be deducted by that REIT or controlled company before taking into account any deduction in terms of subsection (2)(a);

(b) there must be allowed as a deduction from the income of that REIT or that controlled company the sum of any taxes on income proved to be payable by that REIT or that controlled company in respect of any amount to any sphere of government of any country other than the Republic, without any right of recovery by any person other than a right of recovery in terms of any entitlement to carry back losses arising during any year of assessment, limited to the amount of taxable income that is attributable to those amounts, before taking into account any deduction in terms of paragraph (c) and subsection (2)(a);

(c) where during any year of assessment a REIT or controlled company has made a bona fide donation to any organization as contemplated in section 18A(1)(a) or (b) there must be allowed to be deducted an amount equal to the amount of that donation: Provided that the deduction so allowed may not exceed 10 per cent of the taxable income of that REIT or controlled company after taking into account any deduction in terms of paragraph (a) and (b) but before taking into account any deduction in terms of subsection (2)(a); and

(d) where a foreign dividend is received by or accrued to a REIT or controlled company, section 10B(2)(a) must not apply.

(3) …………….

(4) A company that is a REIT or a controlled company on the last day of a year of assessment may not deduct by way of an allowance any amount in respect of immovable property in terms of section 11(g), 13, 13bis, 13ter, 13quat, 13quin or 13sex.

(5) In determining the aggregate capital gain or aggregate capital loss of a company that is a REIT or a controlled company on the last day of a year of assessment for purposes of the Eighth Schedule, any capital gain or capital loss determined in respect of the disposal of:

(a) immovable property of a company that is a REIT or controlled company at the time of the disposal;

(b) a share or a linked unit in a company that is a REIT at the time of that disposal; or (c) a share or a linked unit in a company that is a property company at the time of that disposal, must be disregarded.

(6)(a) Any amount of interest received by or accrued to a person during a year of assessment in respect of a debenture forming part of a linked unit held by that person in a company that is:

(i) a REIT or a controlled company that is a resident must be deemed to be a dividend received by or accrued to that person; or

(ii) a controlled company that is a foreign company must be deemed to be a foreign dividend received by or accrued to that person, during that year of assessment.

(b) Any amount of interest received by or accrued to a company that is a REIT or a controlled company that is a resident during a year of assessment in respect of a debenture forming part of a linked unit held by that company in a property company must if the property company is a resident be deemed to be a dividend, or if the property company is a foreign company be deemed to be a foreign dividend, received by or accrued to that company during that year of assessment if that company is a REIT or a controlled company that is a resident at the time of that receipt or accrual

(c) Any amount of interest paid in respect of a linked unit in a REIT or a controlled company must be deemed:

(i) to be a dividend paid by that REIT or that controlled company that is a resident for the purposes of the dividends tax contemplated in Part VIII of this Chapter; and

(ii) not to be an amount of interest paid by that REIT or that controlled company for the purposes of the withholding tax on interest contemplated in Part IVB of this Chapter.

(7) If during any year of assessment a company that is a REIT ceases to be a REIT and that company does not qualify as a controlled company or a company that is a controlled company ceases to be a controlled company and that company does not qualify as a REIT:

(a) that year of assessment of that REIT or controlled company is deemed to end on the day preceding the date on which that company ceases to be either a REIT or a controlled company; and

(b) the following year of assessment of that company is deemed to commence on the day on which that company ceased to be either a REIT or a controlled company.

(8) If a REIT or a controlled company cancels the debenture part of a linked unit and capitalizes the issue price of the debenture to stated capital for the purposes of financial reporting in accordance with IFRS:

(a) the cancellation of the debenture must be disregarded in determining the taxable income of the holder of the debenture and of the REIT or controlled company;

(b) expenditure incurred by the holder of a share in the REIT or controlled company in respect of the shares is deemed to be equal to the amount of the expenditure incurred in respect of the acquisition of that linked unit; and

(c) the issue price of the cancelled debenture must be added to the contributed tax capital of the class of shares that forms part of the linked unit.

Future articles will deal with various types of taxes for REIT's such as foreign tax, normal tax, capital gains tax, dividends tax, VAT, interest and deductions.