Pension Funds to benefit from tax friendly REIT structure

Posted On Tuesday, 16 April 2013 03:48 Published by eProp@News
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South African-listed property sector is set for a radical overhaul that is likely to woo a far greater number of foreign investors.

Pension Funds to benefit from tax friendly REIT structureThe new real estate investment trust (REIT) structure will bring the local property sector in line with its international counterparts. It will also make the local property sector the eighth largest in the world.

The JSE began implementing the National Treasury’s REIT tax legislation when it released listing requirements last week and analysts predict that this will attract new investors — both foreign and local — to the local property sector. This is because it simplifies the tax on property investments and brings South Africa’s regulations in line with the best in the world.

The listed property sector was one of the best performing sectors on the stock exchange over the past 12 months. The sector, worth R222-billion, had total returns of 36% in 2012. The new REIT structure, which has been six years in the making, could help the property sector to maintain this stellar growth.

Aside from bringing the South African property sector onto the radar of foreign investors, there are many other financial benefits for property funds thanks to the tax treatment of the REIT structure. The new tax rules mean a REIT can deduct all the distributions it pays to investors as an expense. So, if a REIT pays all its distributable earnings to shareholders, it should not have to pay any tax.

If investors put money into a REIT as part of a retirement annuity or some form of pension, they should pay no tax on dividends. For shareholders, the only difference is the nature of the company distributions the investor receives.

When the company becomes a REIT, these distributions will change from “interest” to “rental income” in the form of a taxable dividend. This means foreign investors in REITs could be levied a dividend-withholding tax after January 2014 — the current rate of which is 15%.

AJ Jansen van Nieuwenhuizen, director and head of tax at Grant Thornton, said the largest beneficiary of the new REIT structure would be pension funds.  “Any distribution will be tax exempt. For the man in the street, the net effect from a distribution point of view will be negligible.” Another benefit of the new structure is that there will no longer be any tax levied on the trade of REIT units. In the past, like most other tradable instruments, listed property fund units were subject to securities transfer tax.

For the actual companies that become REITs, there are also benefits to the new structure. For example, when a REIT sells a property, it does not have to pay capital gains tax on any profit from the sale.

Anthony Katakuzinos, chief operating officer of Stanlib Retail, said although the new structure would have minimal impact on investor returns in the listed property space, the legislation “brought South Africa in line with the leading property markets”. “If South Africa had a REIT structure all these years, there would have been a whole lot more property development companies listed and much higher investment in the sector,” said Katakuzinos. 

According to Estienne de Klerk, chairman of the South African REIT Association committee and director of Growthpoint Properties, the biggest benefit of the new dispensation will be to ensure “certainty of income” for investors. De Klerk said there were two forms of listed property investment entities in South Africa: property loan stocks companies and property unit trusts. Both will have to adapt to the new rules set out by the JSE and qualify to list on the exchange’s new REIT board.

To become a REIT, a company must own property worth at least R300-million, keep its debt below 60% of its gross asset value and earn 75% of its income from rentals or property it owns. Finally, a REIT must pay at least 75% of its taxable earnings to its investors each year. This is likely to be a big boon for the listed property sector. “Externally, the key benefit of the new REIT structure is that it will propel South Africa to being the eighth largest jurisdiction and will qualify us to be included in a whole lot of REIT indices, thus attracting foreign money into our local market,” said De Klerk.

 

Last modified on Wednesday, 22 May 2013 10:10

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