The Property Loan Stock Association and the Association of Collective Investment Schemes in Property have been in negotiations with National Treasury for some years now, regarding the implementation of blanket legislation for both variable loan stock companies and Collective Investment Schemes in Property, under the banner of Real Estate Investment Trusts (so called REIT's).
It is not clear in what form the dispensation will come, however, it does appear as though there concerns have been heard. It has been proposed in the tax proposals to the 2012 budget speech that the governance of property loan stock entities will be placed on a par with property unit trust. It is proposed that the rental income from these entities will fall under the pass-through regime that currently applies to property unit trust. It is our understanding that the intention is to ensure that both variable loan stock companies and Collective Investment Schemes in Property are effectively placed in a tax neutral position vis-à-vis the distribution of the rental income.
It is noted that Treasury appears to be concerned that other taxpayers (i.e. taxpayers other than variable loan stock companies) may use the linked unit structure (e.g. a R10 linked unit of which R0.01c is linked to the equity component and the remaining R9.99 linked to the debenture component) in order to avoid tax by relying on an excessive interest deduction. Taxpayers issuing linked unit should thus be mindful of Treasury's view on these types of structures.
Written by Andrew Lewis, Senior Associate, Tax, Cliffe Dekker Hofmeyr