COMMENTARY ON NATIONAL TREASURY DRAFT NOTICE: SETTING THE REQUIREMENTS AND CONDITIONS THAT MUST BE MET BY A COMPANY FOR PURPOSES OF PARAGRAPH (b) OF THE DEFINITION OF “REIT” IN SECTION 1(1) OF THE INCOME TAX ACT, 1962 (Act No.58 of 1962)

The draft requirements were reviewed, and we proposed certain changes that we believe will enhance and reduce the ambiguity in setting the requirements and conditions for a Company qualifying as a “REIT” in terms of Paragraph (b) of the definition of “REIT” in section 1(1) of the income tax act,1962 (Act No.58 of 1962).

The following recommendations were made:

  • 1.   AMENDMENT TO THE “WHOLLY-OWNED SUBSIDIARY” REQUIREMENT

    Recommendation

    In summary we therefore recommend that the definition of a wholly owned subsidiary be expanded as follows:

    “wholly-owned subsidiary” means a company of which at least 75% of its issued equity shares are held or controlled, alone or in any combination, by one or more insurers, retirement funds, short-term insurers, public entities listed in Schedule 2 or 3 of the Public Finance Management Act, 1999 or REITs.

  • 2. REFERENCE TO RENTAL REVENUE
    Recommendation

    We recommend that a definition for “rental revenue“ be inserted, being the definition contained in the JSE listing requirements, or preferably that this requirement be aligned with reference to the wording included in the definition of “qualifying distribution” that at least 75% of the gross income of a REIT consists of “rental income” as defined in section 25BB(1). This amendment is necessary to give effect to the requirements of paragraph 2(b) which envisages that an unlisted REIT may hold an interest in a “property company”.

  • 3. CLARIFYING THE TIMING OF THE VARIOUS REIT QUALIFICATION TESTS

    Whilst paragraphs 2(a) to 2(g) sets out the requirements and conditions, the timing of when some of these tests must be applied needs to be clarified. For avoidance of doubt SAPOA recommends that the draft Notice be explicit in this respect.

    Recommendation

    SAPOA is of the view that the current draft should clarify that the “wholly-owned subsidiary test” will be conducted at the end of the year of assessment to align to the timing referred to in the definition of “qualifying distribution” and “rental income” in section 25BB(1) of the Income Tax Act.

    In summary SAPOA therefore recommends the following:

    A company meets the requirements and conditions to qualify as a REIT if:

b) at the end of either the current or previous immediately preceding year of assessment 80 per cent or more of the value of the assets, reflected in the annual financial statements prepared in accordance with the Companies Act or IFRS for either the current or previous year of assessment, is directly or indirectly attributable to immovable property and interest in a “property company” as defined in section 25BB(1) of the Act;

c) at least 75% of the revenue as reflected in the statement of comprehensive income of the company in the current year of assessment is derived from rental revenue;

d) at the end of either the current or immediately preceding year of assessment the total liabilities or consolidated liabilities, excluding preference shares, of the company is not more than 60 per cent of the total assets or consolidated assets as reflected in its latest audited or reviewed consolidated IFRS financial statements; for either its current or immediately preceding year of assessment;

e) the company has gross assets of at least R300 million in its latest audited or reviewed consolidated financial statements for either its current or immediately preceding year of assessment;

f) the company qualifies for a tax deduction of distributions under section 25BB(2) of the Act on a continuous basis in the current year of assessment;