Association of Property Unit Trusts chairman John Rainier explains that when capital gains tax was introduced, it became apparent that the historic structure of property unit trusts was not in the investors' best interests as it unintentionally brought about an effective double tax both at the trust level as well as in the hands of unit holders.
"When properties in a fixed-property company are sold, capital gains tax and secondary tax on companies are levied. However, like all unit trusts (equity and property), the trust is exempt from capital gains tax when it sells an asset. This means that the trust could sell its investment in an underlying fixed property company at no detriment to its unit holders," says Rainier.
In consultation with South African Revenue Services and the Financial Services Board (FSB), amendments were made to the Collective Investment Schemes Control Bill to allow property unit trusts to hold their properties directly and not only through fixed-property companies.
"This will benefit the investing public, as after the initial transfer of the properties from the fixed-property companies to the trust, no further capital gains or secondary companies tax will be payable in the event of a capital gain, which protects the value of the public's investment," Rainier says.
"As owner of the properties, the trust can now also conduct a rental enterprise and will be able to recover the VAT element of the service fee it was previously unable to recover. This will again add to the investor's value," he says.
Grayprop adopted the new trust deed, and purchased the properties from the fixed-property companies with effect from April 1. It is anticipated that the physical transfer of all the properties will be effected by the end of September.
The costs of the restructuring, inclusive of the conveyancing costs and tax liability, are anticipated to be in the order of R5m, and the net saving for unit holders should be about R1m for the first year.
Sycom adopted the new trust deed on March 31 and has transferred half of its properties from fixed-property companies to the trust. Martprop is currently finalising the adoption of the new trust deed with the FSB.
Prima is also in the process of finalising the adoption of the new trust deed with the FSB. Capital will adopt the new standard trust deed, having obtained prior unit holder approval to do so.
