Real Estate Investment Trusts (“REITs”) posted the highest year-on-year return on investment (ROI) of any asset class in South Africa in October 2015. According to data from Catalyst Fund Managers REITS returns reached 15.6%, with a year-on-year ROI of 20.2%. Conversely, equities posted returns of 11.3% and bonds posted at 4%.

Listed property seems to be a favourite asset class for growing income streams. In contrast to equities, it delivers predictable income and less volatile earnings growth, even in times of economic down-turn. This steady nature of returns is attracting investors, garnering investment momentum and is expected to maintain investor appeal by continuing to outpace other asset classes.


A REIT is a company that owns income-producing immoveable property and allows investors to invest in portfolios of large-scale properties through shares. While the term ‘REIT’ suggests that such investment entities take the form of trusts, REITS may be, and mostly are, formed as companies.

With the introduction of REITs in 2013, South Africa now enjoys one of the most flexible REIT regimes globally. This new regime is set to benefit the property sector through its simpler, clearer tax procedure and by making the industry more internationally competitive and attractive.

Section 1 of the Income Tax Act 58 of 1962 (“the Act”) defines a REIT as “a company that is resident and the shares of which are listed on an exchange and as shares in the JSE Limited Listings Requirements.” Consequently, for a company to qualify as a REIT it also need to comply with the JSE Listing requirements.

Similarly, a “controlled company” is defined in section 25BB of the Act as a subsidiary of a REIT. As such a REIT needs to directly or indirectly hold the majority of the voting rights in the controlled company or have the right or power to elect or control the majority of the voting rights of the board of directors of the controlled company.

REITs are a unique investment vehicle in that investors are able to invest in immoveable property while still benefiting from an annual income in the form of a “qualifying distribution”. They are proving to be an attractive opportunity due to the income they generate through this compulsory annual distribution, similar to interest on a loan, and due to their ability to raise debt against the rental income generated by the underlying immovable property.

The taxation of such vehicles occurs on the investor level; meaning that the investors will be taxed on the dividends or interests that they receive. So while a REIT takes the form of a company it will be taxed according to the conduit principles applicable to trusts.


This new regime offers new investment opportunities and affords certain tax advantages. However, as the legislation is new and untested, uncertainties and inconsistencies may arise.


Previously in South Africa, property loan stocks (PLSs) and property unit trusts (PUTs) fulfilled the function of REITs, but efforts have been taken to align our property investment structures with international standards and clarify conflicting tax interpretations. These funds were subject to differing regulation which caused inconsistencies in their tax assessment. For instance PLSs were regulated in terms of the Companies Act 71 of 2008 while PUTs were regulated by the Collective Investment Schemes Control Act 45 of 2002. Furthermore, while PUTs have been largely seen as overregulated, PLSs have been considered under regulated.

The formulation of this new regime was to bring the PUTs and PLSs under one, unified regime in line with international standards and to incentivise investors to invest in the South African property market.

Earlier this year the South African Revenue Services (“SARS”) published a draft tax interpretation note on REITs and controlled companies (“the Interpretation Note”). The purpose of the Interpretation Note is to provide guidance on the interpretation and application of the taxation of REITs and controlled companies. While an interpretation note does not enjoy equal weighting as a practice note it still carries some guidance and gravitas as an official publication of SARS and once finalized it will provide much needed certainty regarding the taxation of REITs and controlled companies.


Under the new regime REITs are taxed according to the flow-through principle whereby amounts received are taxed in the hands of the investor, according to the investor’s personal marginal tax rate, not in the hands of the REIT. However, such amounts received will depend on their nature. Only amounts received by a REIT or a controlled company held on revenue account will be considered revenue amounts. If derived from a capital nature such amounts are exempt from capital gain tax (“CGT”).

Investors in the REIT or controlled company receive returns from their investments through an annual, compulsory “qualified distribution” paid out by the REIT or controlled company. Such a distribution will only qualify as a deductible qualified distribution if 75% of the REIT’s or controlled company’s gross income from the its preceding financial year consisted of “rental income”. Rental income in turn includes dividends from another REIT or property company; qualifying distributions from a controlled company and income derived from the use of immoveable property. In a REIT or controlled company’s first year of assessment, the 75% rule will be calculated according to its gross income derived from its commencement year.

Dividend exemption does not apply to dividends or interest income deemed as a dividend and paid-out to shareholders. As such resident shareholders will be taxed on such dividends or deemed dividends according to normal tax while non-resident shareholders will be liable for dividends withholding tax, subject to reductions due to double-taxation agreements between tax-authorities.

Where a debenture is linked to the REIT or controlled company, unlike ordinary companies, distributions and interest payed out will be deductible. From the perspective of an investor, interest received by or accrued to a resident shareholder on a debenture linked to a REIT or controlled company will be deemed to be a dividend and is fully taxable according to the normal tax principles but are exempt from dividend tax. Such interest received by or accrued to a non-resident shareholder will not be taxed normally but will instead be subject to dividend tax.

The deductible amount for such distributions are calculated before the inclusion of any taxable capital gains; qualifying distributions and assessed losses carried forward. This prevents the creation or increase of an assessed loss carried forward and any distribution made exceeding the deductible amount will be cancelled.

A REIT or controlled company incurs no CGT related to the disposal of immovable property or the disposal of shares or linked units in another REIT or property company. However, proceeds from the disposal of such assets will be included in the entity’s gross income. A depreciation allowance on non-immoveable assets may still be claimed. CGT will still be incurred for all other capital gains and losses.

Where a REIT or controlled company loses its classification as a REIT or controlled company for whatever reason, its year of assessment as a REIT or controlled company ends on that day and thereafter will be assessed according to the ordinary tax laws applicable to an ordinary trust, company or collective investment scheme.


The introduction of REITs is a welcome development to the South African property investment sector as it modernizes the property investment landscape; aligns our investment entities with international standards and provides a clearer, more unified and beneficial tax regime. This, overall, makes South Africa a far more attractive investment opportunity for both local and foreign investment.

While further clarity on the tax structure for REITs needs to be established and developed, this new tax regime is more beneficial for investors and encouraging for future growth and investment.