New tax law could dampen prospects
While, Prime Time celebrates its amplified performance as a result of reduced vacancies and commissioning of new properties, these fortunes could be reversed by a new tax law that threatens ‘double taxation’ for listed property companies.
Botswana Unified Revenue Service (BURS) has dropped tax incentives for Variable Rate Loan Stock companies (VRLS) under its new Income Tax Amendment Act 2018 (Amendment Act) which will result in the property companies footing more taxes. The Amendment Act is going to be effective from 1 July 2019, effecting the 2020 tax year.
The negative impact on Botswana’s listed property sector of the Income Tax Amendment Act passed at the end of 2018 combined with the proposed changes to Property Transfer Tax seem likely to undermine foreign investor confidence said Prime Time Managing Director Sandy Kelly.
“In the bigger picture, we cannot talk about the Group’s future prospects without highlighting the effect on our investors on the recently introduced Income Tax Amendment Act 2018. This Act limits the deduction of net interest expense in calculating taxable income and will result in the Company suffering income tax on its profits prior to their distribution as debenture interest. The Act was passed in December 2018, however it retrospectively affects PrimeTime’s current financial period commencing 1 September 2018 as no transitional provisions for its implementation have been imparted,” he said.
He said the company is working with its fellow listed property firms and organisations representing the business community to engage government in finding a long-term workable solution to the sudden implementation of the Income Tax Amendment Act 2018.
“Additionally, the Board is currently assessing what options are available to the Group to protect the unitholders interests in this regard.”
Dr. Keith Jefferis, Managing Director at independent economic think tank, Econsult Botswana said these changes will effectively kill off VRLS, which he feels are the most important business structures in the property sector.
Jefferis argued that a proposed change to the Transfer Duty Act to raise the rate of transfer duty on property transactions for sales to non-citizens (both individuals and firms) from 5 percent to 30 percent runs the risk of undermining the domestic property market, reduce property prices, and reverse recent efforts to expand mortgage lending by banks. Jonathan Hore, Managing Director at tax advisory firm, Aupracon tax Botswana the new law will mostly kill off VRLS firms – owned partly in equity and in debt because they will be subjected to double taxation by the new law.
The ownership of linked units in a variable rate loan stock company is tax efficient as profits are distributed by means of a dividend and a debenture (In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The interest paid to them is a charge against profit in the company’s financial statements.) interest payment which is larger than the dividend. The full amount of interest is deductible from income of the variable rate loan stock company as an expense incurred in the production thereof.
Dividends paid by the company are subject to withholding tax which is a final tax. Interest payable to residents which are taxpaying entities is subject to 10 percent withholding tax, which can be credited against tax payable by the recipient. Any capital gains on disposal of linked units after one year of acquisition are exempt from taxation under the current taxation regime as the Company has offered more than 49 percent of its linked units to trade on the Botswana Stock Exchange. However, the new tax laws are about to erase all that.
Most companies rely on borrowed funds to fund their operations. As such, Hore, the tax expert said any limitation to interest deductions could significantly increase the tax liability of such companies.