SARS Issues Draft Interpretation Note On REITS
Monday, May 16, 2016
The South African Revenue Service (SARS) has issued a draft interpretation
note providing guidance on Section 25BB
of South Africa's Income Tax Act, which deals with the taxation of real estate
investment trusts (REITs).
Section 25BB went into effect for years of assessment commencing on or after
April 1, 2013. In order to qualify as a REIT, a company or a portfolio of a
collective investment scheme in property must be a resident of South Africa,
listed on the Johannesburg Stock Exchange (JSE) as a REIT, and meet the JSE's
South African REITs own several kinds of commercial property like shopping
centers, office buildings, factories, warehouses, hotels, hospitals and, to
a lesser extent, residential property, in South Africa. Some REITs also invest
in property in other countries.
SARS noted that the effect of Section 25BB is to treat a REIT or a controlled
company as a flow-through entity for income tax purposes. This treatment is
achieved by allowing the REIT, or a REIT's resident controlled company, a deduction
for a "qualifying distribution."
The deductible amount of the qualifying distribution is limited to the taxable
income of the REIT or controlled company before taking into account the qualifying
distribution, any assessed loss brought forward from the previous year of assessment,
and any taxable capital gain.
A distribution by a REIT or a controlled company will constitute a deductible
qualifying distribution only if at least 75 percent of any gross income derived
by the REIT or controlled company for the preceding year of assessment consisted
of "rental income." Rental income includes dividends from another
REIT, dividends or foreign dividends from a property company, a qualifying distribution
from a controlled company, and income from the use of immovable property.
Comments on the draft interpretation note should be received by SARS on or
before July 29, 2016.