AN OVERVIEW OF SA REIT TAX LEGISLATION BRAM GOOSSENS EQUITES PROPERTY FUND

Transcription

1 AN OVERVIEW OF SA REIT TAX LEGISLATION BRAM GOOSSENS EQUITES PROPERTY FUND

2 Contents A brief history of REITs Status of SA REIT legislation Burning tax issues The way forward

3 A brief history of REITs

4 Introduction to global REITs REIT legislation was first introduced in 1960 in the US, followed by the Netherlands (1969) and Australia (1971), however, these entities struggled to gain traction, as laws placed strict limitations on REITs In 2012, there were 22 countries who had fully adopted the REIT structure, the last five years have seen an additional 15 countries adopting the legislation U.S. Congress enacts the first REIT legislation Globalisation of REITs gains momentum Global REIT legislation adopted in 22 countries The modern REIT era emerges REITs begin recap process after the global financial crisis Global REIT legislation adopted in 37 countries The modern REIT era emerged in the early 1990s after a major downturn in commercial real estate values. For many overleveraged U.S. real estate counters, the structure provided a way to access capital markets There are currently 37 REIT markets with a total market capitalization of c. US$1.7 trillion. More than 75% of the companies in in the global real estate securities market are REITs

5 History of SA REIT legislation Prior to SA REIT legislation there were historically two forms of listed property investment entities in South Africa: Property loan stocks companies (PLSs) and Property unit trusts (PUTs) Prior to 2013, the listed property sector on the JSE comprised five PUTs and approximately 20 PLS s, the largest of which were major counters including Growthpoint Properties, Redefine Properties and Hyprop Properties The listed property sector understood that neither PLS s or PUT s PLS offered the uniformity and simplicity to facilitate international investment and that these entities were unevenly regulated and subject to different tax treatments In order to combat the issues facing PLS s and PUT s, the listed property sector engaged with National Treasury ( NT ) to formalize and adopt a uniform REIT legislation in South Africa, in line with global best practice

6 Timeline of significant events Private sector starts engaging with treasury regarding a uniform REIT regime The new Taxation Legislation Amendment Bill released in February 2013 contained the Section 25BB REIT tax dispensation clearing the way for REITs in SA In May 2013, the SA REIT Association was launched to represent company and trust REITs Feb 2013 March 2013 May 2013 NT met with UK and European experts to learn about best-ofbreed practices in the UK and globally In March 2013 the JSE released the amended Section 13 of their Listings requirements enabling REITs to list from 1 May 2013

7 Status of SA REIT legislation

8 Progression of REIT legislation The original s25bb, effective 1 January 2013 was broadly considered to level the playing field in respect of listed property investment instruments: The legislation addressed the concerns which previously existed concerning the deductibility of interest by PLS Property investment income distributed to resident shareholders was deemed to be taxable as ordinary income Capital gains were deemed to be taxable when the investors dispose of the shares and will not be recognized in the REIT Following the introduction of s25bb in 2012, there were several teething problems as could be expected relating to implementation, these were remedied through minor amendments over the past five years

9 Progression of REIT legislation In consultation with industry experts and practitioners involved in the practical implementation of s25bb, an interpretation note (IN97) was published in December 2017 which provided more guidance to SA REITs IN provided much anticipated guidance on the interpretation and application of s25bb IN97 considered other selected provisions of the Act that are relevant to REITs, controlled companies and the holders of shares in REITs The IN reflects the amendments introduced by the Taxation Laws Amendment Act 15 of 2016 and any amendments introduced in prior years

10 Burning tax issues

11 Burning tax issues Definition of rental income Income tax treatment of cross-currency interest rate swaps Input VAT apportionment methodology Economic double tax on foreign investments

12 Definition of rental income Rental income >= 75% of gross income for distribution to be deductible as a qualifying distribution Section 25BB(1) of the ITA Rental from use of immovable property Dividend from a REIT Qualifying distribution from a controlled company Dividend or foreign dividend from property company

13 Definition of rental income What about: Unrealised exchange gains on forward exchange contracts (FECs)? Interest on a cross currency or interest rate swap that is gross settled? Interest received on an interest rate cap used to fixed net income on a property acquisition? The narrow ambit of the definition can lend itself to anomalous results that should be clarified through an amendment to s25bb(1)

14 Income tax treatment of cross-currency interest rate swaps (CCIRS) CCIRS is an effective tool to exploit comparative advantages when a REIT invests offshore There are three divergent views on the income tax treatment of CCIRS: two loan agreements Interest-bearing ZAR loan asset Interest-bearing GBP loan liability a series of FECs Each future cashflow reflects a separate FEC a composite arrangement Effectively one transaction which is considered as an economic event

15 Input VAT apportionment methodology Turnover-based method of apportionment under BGR (VAT): NO.16 Apportionment ratio calculated as: a taxable supplies b exempt supplies c other amounts received/accrued Dividends are included within item c Let s see an example

16 Input VAT apportionment methodology R'm Comment Property revenue 80 Included in (a) Interest revenue 20 Included in (b) Dividends from controlled companies 120 Included in (c) Revenue 220 Cash property operating expenses - 50 Input VAT of R7m paid Operating profit 170 Turnover-based apportionment ratio: 36% Turnover-based apportionment ratio (excl. dividends): 80% Under existing BGR: Property operating expenses - 7 Input VAT deduction permitted - 3 Disallowed input VAT deduction - 4 Excluding dividends from denominator: Property operating expenses - 7 Input VAT deduction permitted - 6 Disallowed input VAT deduction - 1 Disallowed input VAT deduction because of the flow-through of dividends

17 Economic double tax on foreign investments Compromises conduit nature of REIT Encourages treaty shopping in lowtax jurisdictions to reduce withholding tax OECD BEPS action plans attack these structures Ultimate shareholders left out-ofpocket SARS should grant a tax credit to ultimate shareholder to ensure some level of tax neutrality and to encourage the right behaviour Tax levied of 40.5% (45% x 90%) + 10% = 50.5% less foreign tax credit of 23.5% The current position The proposal 49.5% 27% 34.4% 42.1% South Africa Source country 13.5% 76.5% 76.5% 100% Withholding tax 10% Income tax 23.5% withholding tax and income tax

18 The way forward

19 The way forward Definition of rental income should be widened to include all property-related income Clarity should be provided on the income tax treatment of CCIRS especially in a REIT context Dividends from controlled companies should be removed from the denominator of the input VAT apportionment formula REIT shareholders should be provided with a foreign tax credit on income and withholding taxes paid by REIT to avoid economic double tax

20