Real Estate Investor Magazine South Africa November 2018 | Page 40

TAX
National Treasury hopes to clarify
anomalies relating to taxing REITS
Wesley Grimm, Associate
and Craig Miller, Director at
Webber Wentzel
T
he taxation of real estate invest-
ment trusts (REITs) was dis-
cussed at the recent National
Treasury Workshop on the 2018 draft
Taxation Laws Amendment Bill, held
recently in Midrand. The correct tax
treatment of certain anomalies, including
the taxing of commercial lease deposits.
Commercial lessors typically hold
significant deposits from tenants, both in
number and value. A view has emerged
among certain officials at SARS that
commercial tenant deposits comprise
gross income where such amounts are not
deposited into a separate bank account.
It is trite law that a taxpayer may not
be subject to tax on amounts received by
them for the benefit of another. Though
commercial lessors receive tenant
deposits, such deposits are not received
by them on their own behalf and for their
own benefit. 
In the case of  Omnia Fertilizer
Limited v CSARS  65 SATC 159, the
court held that the accounting treatment
of amounts by a taxpayer evidences the
intention of the taxpayer. Factually, where
commercial lessors treat tenant deposits
as a liability for accounting purposes they
do not intend to receive such amounts
on their own behalf and for their own
benefit within the meaning of gross
income. This is supported by the fact that
lessees reflect deposits paid by them as
assets in their financial statements.
In essence, not every obtaining of
physical control over money or money’s
worth (i.e. an asset with a monetary value)
constitutes a receipt for the purposes of
the definition of gross income. Money
obtained and banked by someone (as
agent or trustee for another) does not
38
receive that money as gross income i.e.
tenant deposits are not “received by”
commercial lessors within the meaning
of gross income. Rather, tenant deposits
are provided by lessees to commercial
lessors as security for the fulfilment by
tenants of all their obligations. A tenant
deposit, so received, does not belong
to the commercial lessor; ownership
remains vested in the lessee and must
be refunded to the lessee in terms of the
relevant lease agreement.
In  Pyott v CIR  1945 AD 128, the
amounts received by the taxpayer were
set aside as a provision for allowances on
containers returnable to  Pyott,  but the
deposit amounts were not deposited into
a separate trust account and were utilised
for the general purposes of the business.
By contrast, tenant deposits received
by commercial lessors are meticulously
recorded and kept separate, often in
call accounts. SARS› purported reliance
on the  Pyott  case is for this, and other
reasons, therefore factually incorrect. It
is not disputed that where deposits are
available to a taxpayer, to do with it as
it pleases, then such deposits would, and
should, be included in that taxpayer›s
gross income and may, consequently,
be subject to income tax as the deposits
are received by that taxpayer for its own
benefit. 
In  MP Finance Group CC (in
liquidation) v CSARS    2007 SCA 71,
the Court held that an amount will be
“received by” a taxpayer for the purposes
of the definition of gross income if it
has intended to receive such amount for
its  own benefit  (our emphasis). Upon
receipt, commercial lessors have no
intention to receive the tenant deposits
for their own benefit for the ordinary
purposes of their business. When
the deposit, or a portion thereof, is
applied by a commercial lessor it would
only constitute gross income in the
commercial lessor›s hands at that point
in time.
In Special Board Decision No. 166
(Germiston Special Board), dated
18 March 2002, similarly to the decision
in  C v COT  46 SATC 57 individual
lessors received rental deposits, which
were reflected as current liabilities
and refundable upon the expiry of the
NOVEMBER/DECEMBER 2018 SA Real Estate Investor Magazine
respective leases. The lessors in that case
were entitled to deduct from the deposits
to be refunded any amounts owing to
them by the respective lessees at the end
of the lease period. The board held that
there was no contingency attached to
the taxpayer›s obligation to refund the
deposits. The mere fact that lessors may
apply the right of set-off did not render
the taxpayer›s obligation to repay the
deposits conditional and, by extension,
could not cause the deposits to be
included in the lessor›s gross income. This
feature alone, so it was held, was enough to
distinguish the case from those like Pyott.  
The inescapable conclusion is that
commercial lessees intend to deposit
money with commercial lessors in such
a way that the deposits should be kept
separate from the commercial lessors’ own
funds. This is consistent with the view
expressed by SARS on its website on the
page titled Tax on Rental Income, which
we agree with and which is repeated
below:
“The receipt or accrual of a rental
deposit by a lessor need not be included
in the lessor’s gross income at the
stage of receipt or accrual if there is an
unconditional obligation on the lessor
to refund the deposit at a later stage. It
will only become gross income when the
deposit is applied by the lessor...”
For SARS to seek to impute different
legal consequences to commercial lease
agreements, other than what was expressly
agreed between the parties, undermines
the sacrosanct principle of legal certainty.
Commercial lessors and lessees are agreed,
in fact and in law, as to the treatment of
the tenant deposits and SARS may not
unilaterally re-imagine the legal effect
of the terms of the lease agreements
(CSARS v Cape Consumers Proprietary
Limited 61 SATC 91).
Commercial tenant deposits are akin to
a loan with a definite and unconditional
liability to refund it to the relevant lessee.
Consequently, such deposits should not
be included in commercial lessors’ gross
income because there is an absence of a
beneficial receipt by commercial lessors
and such deposits are received on capital
account.
SOURCE Webber Wentzel