An analysis of the Real Estate Investment Trust tax regime on the South African property sector

Abstract

Real Estate Investment Trusts (REITs) are used by individual investors to mitigate the risks relating to direct ownership. Prior to the implementation of the new REIT tax regime in South Africa, the regulatory framework and tax legislation that governed the former property investment vehicles, namely Property Unit Trusts and Property Loan Stock Companies, were fragmented and inconsistent. This caused uncertainty pertaining to the regulation and tax treatment of such investments and had a negative impact on the willingness of foreign investors to invest in South Africa. Consequently, a new REIT tax regime was introduced in South Africa to ensure simplicity, uniformity and consistency in the tax and regulatory environment of property investment vehicles while making it internationally comparable. The main objective of the study was to analyse and evaluate various aspects of the new REIT tax regime to determine, firstly, whether the taxation of the listed property sector in South Africa has improved in a fair and reasonable manner and, secondly, whether these amendments accommodate the needs of both the listed property sector and its investors. The study found that the new REIT regime ensures the application of substance over form and eliminates deficiencies in the previous tax treatment of property investment vehicles. From comparisons between the South African and US REIT structures, it became apparent that the South African REIT structure is still underdeveloped in terms of accommodating all types of organisations and stakeholders as the US REIT structure does. Despite the benefits associated with the new REIT structure, the study did identify scope for improvements like its extension to also include the unlisted property sector.