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 listings requirements.
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.