Real Estate Investment Trusts (REITS) have become a popular investment vehicles among investors in SA looking to diversify their investments, as they give exposure to the local commercial and industrial property market.
Through the purchase of shares in a REIT, shares are acquired in a company that owns and operates a real-estate portfolio.
One can, therefore, obtain exposure to the South African real estate market with an investment in a REIT without having to purchase a rental property. The REIT must be listed on the JSE.
For many, investing in a REIT makes investing in real estate far more affordable, as one can buy a share instead of an entire property. It also cuts out the transaction costs of investing in fixed property, such as payment of transfer duty upon purchase and estate agent commission on sale.
However, as an investor in a REIT there are quite significant tax consequences one must be aware of. Payments to shareholders of REITS are generally made through dividends. These dividends are treated differently to normal dividends.
If one owns a share in a JSE-listed company (other than a REIT) and one receives a dividend as a result of owning that share, the share is generally exempt from tax in the hands of the taxpayer. This means that the dividend amount received must be declared to the SA Revenue Service (Sars), but it is not taxable. There is, however, a 20% withholding tax that is paid by the company to Sars before one receives the dividend.
REITS are taxed differently to other shares listed on the JSE. While the dividend from a REIT is not subject to the 20% dividends withholding tax, it is not exempt from tax like a normal dividend. This means that the full amount of the dividend received from the REIT will be subject to tax in the hands of the taxpayer.
For example, if a R40,000 dividend is declared from a REIT (note that one doesn’t actually have to receive the dividend for it to be taxed – if it is reinvested it is also taxable) and the top 45% tax rate is applicable, the tax due on the R40 000 REIT dividend will be of R18,000.
This tax will, for most individuals, be paid on annual assessment of the REIT dividend (under code 4238). If the dividend received from a REIT is more than R30,000 for a tax year then an investor should also register for provisional tax.
In terms of taxation, the dividend received from a REIT is much the same as a profit a property owner would have made on a rental property.
The full amount of the profit (taxable income) from the rental property is included in one’s personal taxable income. This is the same with a REIT dividend.
Not knowing the tax implications of a REIT investment could result in a nasty surprise payment due to SARS. Also, be aware that it is possible for the share price of your REIT to increase in value — in such an instance, the disposal of a REIT investment would attract capital gains tax.
Many South Africans invest in REITS through a unit trust portfolio. Declarations, from a unit trust are dealt with differently. The unit holder may receive dividend income (subject to the 20% withholding tax), interest income (included with other interest income and taxed) and/or be subject to capital gains tax on disposal of a real estate unit trust. The tax liability on the dividend is still applicable even if it is reinvested.
Adapted from an article by tax consultant Daniel Baines which first appeared in Business Day
- 5 Mar, 2019