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Unlisted REITS – Budget Reaction

Friday, 01 March 2013   (0 Comments)
Posted by: Erich Bell
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Property unit trust that invests in immovable property, receives income from rental and pays it through to its investors. In terms of new legislation which becomes effective 1 April 2013, a REIT can deduct such distributions if it resides in South Africa, is listed and at least 75% of its gross income is rental income.

There has been much concern that this regime is going to leave unlisted REITS horribly exposed, particularly when SARS looks to introduce legislation to deal with what is today described as artificial debt. This really relates to the debenture portion of a property linked unit, where the debt instrument is not likely to be repaid in 30 years. SARS are now looking to re characterise some of these debt instruments as shares if they have certain stipulated features.

Accordingly, the Budget review indicates that the REITS legislation will look to extend to unlisted REITS provided they are subject to similar regulation as listed REITS. It does not indicate how this regulation is going to be introduced (currently the JSE Limited is the regulator of listed REITS). The Treasury would want it to be extended to wholly owned entities of private and Government pension funds, as well as the long term insurers. It appears that they may be considering the legislation to deal with property syndication, because it indicates that REIT tax relief would be extended to cover other real estate entities subject to such regulation. Moreover it indicates that the property syndication legislation needs to protect investors from the Ponzi schemes which we have seen over the last couple of years.

Source: Alastair Morphet, Director, Tax, Cliffe Dekker Hofmeyr



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