Section 25BB of the Income Tax Act was adopted in South Africa with effect from 1 April 2013 to govern the taxation of real estate investment trusts (REITs). A REIT is a company that owns and operates income-producing immovable property. The definition of a REIT in the Income Tax Act refers to a company that is a South African tax resident whose shares are listed on the JSE as shares in a REIT, as defined in the JSE Limited Listing Requirements.

Consequently the provisions of section 25BB of the Income Tax Act (and other related provisions) only apply to listed REITs, which requires that, inter alia, the REIT –

  • own property with a value in excess of R300 million;
  • maintains its debt below 60% of its gross asset value;
  • earns 75% of its income from rentals; and
  • must distribute 75% of its taxable earnings available for distribution each year.

To the extent that a company qualifies as a REIT (as defined in the Act), the REIT is effectively allowed to operate on a tax neutral basis.

Up until now these provisions did not apply to unlisted property companies. The Minister announced in the Budget that unlisted property-owning companies should qualify for the same tax treatment as listed REITs, provided they become regulated. This news will most likely be welcomed by unlisted property companies, which up until now have not enjoyed the same tax certainty available to listed REITs.

The Minister indicated that the regulations governing unlisted property companies still have to be developed. No doubt the unlisted property company sector will be eager for these regulations to be finalised and circulated for public comment.

The Minister did not specifically indicate whether the regulations will be available for property loan stock companies only or whether they will be available for property unit trusts as well. The Minster did however only refer to unlisted property companies. It is anticipated that not all unlisted property companies will want to conform to the regulations. If these regulations are similar to the JSE Limited Listing Requirements one can expect there to be substantial report requirements, specific debt gearing ratios and a requirement to make minimum distributions within the year, which will not be suitable for all unlisted property companies.