Proposed amendments to REIT related tax legislation

Foreign dividends received by REITs from foreign equity investments should not qualify for the foreign dividend participation exemption, aimed at taxing foreign dividends at an effective rate of 20%.  While this proposal may cause some despair at first glance, it should in fact have very little impact on REITs as they would in the normal course of business have on-distributed such a foreign dividend resulting in a full tax deduction of the foreign dividend as part of a REITs ‘qualifying distribution’ deduction.  

In the current economic environment we are seeing some REITs retaining a portion of their distributable profits as opposed to making full dividend distributions.  In some instances, REIT’s are not making any distributions at all.  This has resulted in greater demand for certainty from investors on expected returns, which could be answered by REITs issuing preference shares.  The current legislation does not however cater for non-equity class shares issued by REITs and needs to be clarified or expanded.

From the limited information available in the budget speech our reading of the proposed amendments is that REITs issuing preference shares, which may be an unlisted class of shares, will not be excluded from qualifying as a REIT for tax purposes.  Furthermore, preference dividends should be treated similarly to ordinary dividends and consequently qualify for a tax deduction in the hands of a REIT.

For most REITs the proposed amendments should not impact their tax positions going forward.

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