During May 2016, the South African Revenue Service ("SARS") released a draft interpretation note on the taxation of Real Estate Investment Trusts ("REIT's").

REIT's have become a popular investment tool in SA as it is a low-risk investment and is easily accessible to investors. According to the SA REIT's Association, apart from SA, more than twenty five countries utilise REIT's as an investment vehicle. Most REIT's in SA specifically invest in commercial property such as "shopping centres, office buildings, factories, warehouses, hotels, hospitals and, to a lesser extent, residential property."

The general objective behind REIT's is to provide investors with a steady rental income and capital growth on their investments.

Section 25BB of the Income Tax Act 58 of 1962 ("The IT Act") provides for the taxation of REIT's. The draft interpretation note published by SARS seeks to provide guidance and clarification on the interpretation and application of section 25BB of the IT Act.

Essentially according to section 25BB, REIT's are entitled to deduct from its income any qualifying distribution made by the REIT in a particular year of assessment (subject to limitations). Qualifying distributions include dividends that are paid or payable by the REIT, or any interest incurred in respect of debentures. In certain instances REIT's are also exempt from Capital Gains Tax.

SA resident (natural persons and trusts) members of REIT's are only liable for normal tax on dividends declared. Non-resident members who receive dividends after 1 January 2014 are subject to dividends tax at a maximum rate of 15%, depending on the Double Taxation Agreement entered into by SA.

It is recommended that investors understand the anomalies of section 25BB prior to investing in REIT's.