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South Africa: Tax implications of shares exchanged for payment of rental (COVID-19)

South Africa: Tax implications of shares exchanged

In the current economic environment and given the coronavirus (COVID-19) pandemic, when consumer spending has been curtailed and businesses are negatively affected, tenants could be forced to enter into alternative arrangements with their landlords for payment of rent. These arrangements could have unexpected tax consequences.


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Landlords typically receive consideration for renting space to tenants. The tax consequences of standard rental agreements where the consideration is in the form of “cash” is well understood by landlords and tenants, and the income tax and the value added tax (VAT) treatment of these agreements is clear.

If the tenant is not able to pay the amount of the rent due, the tenant may negotiate settlement in another form such as, for example, issuing shares to the landlord.  However, while it might appear that the shares in this instance would be of equal value to the consideration that would have been paid as rent, settling an obligation by issuing shares to the landlord has the potential to create significant complexity and uncertainty for the parties concerned.

How would landlords treat consideration that is not cash?

Under a rental agreement, when the landlord receives shares from the tenant in consideration for use of the premises, there would still be an income tax liability in respect of the market value of the shares received. Practically, the landlord will either have to sell the shares in order to settle the consequent tax liability or alternatively it will have to fund the tax from its own cash reserves.

For VAT purposes, the landlord has made the premises available to its tenant and would have issued an invoice for the use of the property.  The landlord would also have an obligation to pay output VAT on the rental due from the tenant.

When shares are issued by the tenant, the landlord would similarly have to fund the output VAT payment from its own cash resources or alternatively sell the shares that have been issued.

When the landlord receives shares as consideration for use of premises, tax (capital gains tax) could be triggered on the disposal of the shares. The shares which the landlord receives under these circumstances would apparently be reflected as an investment on its balance sheet as opposed to trading stock.

Under a standard rental agreement when the tenant is not able to settle its rental obligation, the landlord is generally entitled to claim a bad debt allowance so that the debt due is written off. This raises several questions:

  • Can the landlord potentially be prejudiced when it no longer reflects a debtor, but instead has a share that is subsequently valued at nil?
  • Would the South African Revenue Service grant a refund or a credit for the VAT when the landlord is forced to write off the shares issued?
  • Are there any adverse tax consequences for the tenants?

Read an April 2020 report [PDF 126 KB] prepared by the KPMG member firm in South Africa

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