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Print articleREITs and corporate reorganisations: 2018 updates
March, 2018 - Michael Reifarth
The following is a summary of the latest amendments pertaining to REITs in the context of corporate reorganisation transactions which have been effected to the Act in terms of the Taxation Laws Amendment Act, 2017 (the “TLAA”).
Corporate reorganisation provisions and REITS: problem solved
In terms of the provisions contained in sections 42 (asset-for-share transactions) and 44 (amalgamation transactions) of the Act, in instances where a party disposes of an allowance asset to another party, the recipient is required to acquire that asset as an allowance asset in order for the so called “rollover” provisions to apply.
Immovable property will generally qualify as an allowance asset where the owner is entitled to claim an allowance in terms of, inter alia, sections 11(g) 13, 13bis, 13ter, 13quat, 13quin and 13sex.
However, a REIT is prohibited from claiming the abovementioned capital allowances in respect of immovable property in terms of section 25BB(4) of the Act.
The anomaly that arose in respect of REITs seeking to acquire immovable property from non-REITs in terms of section 42 and/or 44 of the Act, was that where the disposing party was entitled to claim allowances in respect of such property (ie, the property constituted an allowance asset in the hands of the disposing party), the requirement that the REIT acquires the asset as an allowance asset could not be met since REITs are prohibited from claiming any allowances in respect of such asset. Accordingly, REITS were, in certain instances, precluded from acquiring immovable properties in terms of an asset-for-share transaction or an amalgamation transaction.
However, the provisions of sections 42 and 44 have been amended by the TLAA and sections 42 and 44 of the Act now permit the acquisition of allowance assets by a REIT or a “controlled company” as defined in section 25BB. As such, REITs may acquire immovable properties from non-REIT counterparties in terms of an asset-for-share or amalgamation transaction where such counterparties are permitted to claim allowances in respect of such assets.
Corporate reorganisation provisions and REITS: recoupments clarified
The general concept of effecting a transaction in terms of corporate reorganisation provisions, is that the asset in question effectively “rolls over” from the disposing party (“party A”) to the acquiring entity (“party B”).
With regard to allowance assets, this means that party B will step into the shoes of party A as regards the asset in question, ie, the base cost and historic allowances claimed by party A in respect of such asset will roll over to party B.
The tax implications arising pursuant to any future disposal of such asset by party B will be determined with reference to, inter alia, the allowances that were previously claimed in respect of such asset by party A prior to such asset being acquired by party B.
However, as set out above, REITs are precluded from claiming capital allowances in respect of immovable property. As such, REITs should not be required to account for any recoupments in respect of immovable property assets which are disposed of, in particular, in respect of assets acquired in terms of the corporate reorganisation transactions where the previous owner thereof was not a REIT and was permitted to claim allowances in respect thereof.
The amendments to section 42, 44, 45 and 47 of the Act (including amendments to certain anti-avoidance provisions contained in such sections) clarify that a REIT or a controlled company will not be required to recoup any capital allowances that were claimed in respect of allowance assets prior to such assets being acquired by the REIT or the controlled company in terms of section 42, 44, 45 or 47 of the Act.
