DANIEL BAINES: Reits give a foothold in property, but beware tax implications
As an investor in a Reit there are significant tax consequences you must be aware of
Real estate investment trusts (Reits) are becoming a popular investment vehicle among investors in SA looking to diversify their investments, as they give you exposure to the local property market.
By buying shares in a Reit, you own shares in a company that owns and operates a real-estate portfolio.
You 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 people, investing in a Reit makes investing in real estate far more affordable, as you 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 you must be aware of.
Payments to shareholders of Reits are generally made through dividends. These dividends are treated differently to normal dividends.
If you own a share in a JSE-listed company (other than a Reit) and you receive 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 you receive 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. Let us look at an example to illustrate this.
Example: A dividend received from a Reit: R40,000 (full amount included in taxable income)
Tax payable (depends on your tax bracket):
l 26% tax bracket - R10,400 (26% of R40,000)
l 39% tax bracket - R15,600 (39% of R40,000)
l 45% tax bracket - R18,000 (45% of R40,000)
In other words, if you earn a R40,000 dividend from a Reit (note that you don't actually have to receive the dividend for it to be taxed - if it is reinvested it is also taxable) and you fall within the 45% tax bracket, you will pay tax of R18,000 on the Reit dividend.
This tax will, for most individuals, be paid when you file your annual tax return and declare the Reit dividend (under code 4238). If the dividend that you received from a Reit is more than R30,000 for a tax year you should also register for provisional tax.
In terms of taxation, the dividend you receive from a Reit is much the same as a profit you, as the property owner, would have made on a rental property.
The full amount of the profit (taxable income) from the rental property is included with your 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 also possible for the share price of your Reit to increase in value — in such an instance, the disposal of your Reit would attract capital gains tax.
Many South Africans invest in Reits through a unit trust. Payouts 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
Baines is a tax consultant at Mazars and the author of 'How to Get a SARS Refund'.