Reits are fast gaining popularity among investors due to its high dividend payout requirement and exposure to different property sectors. If we look at an investor’s portfolio, most will hold some portion of Reits in their holdings.
However, as far as receiving dividends are concerned, I believe most investors are only concerned with the amount of DPU they received and all they want is to see this number going up and up each year.
I think as an investor, it helps to understand a little bit of how the Reit structure works and how they can take advantage of the tax structure set by the laws. Having previously worked in a Reit company, I came to understand a little better of how all these things worked. The one thing I want to share today is on the Dividend Distribution Type.
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| Latest First Reit Dividend Payout |
I’m pretty sure that 90% of retail investors look at the above dividend distribution and only noticed the 2.02 cents/share and ignores the rest. That is common, more especially so in Singapore where both dividends and capital gains are not taxed at the trustee and investor’s level. In the US, qualified dividends and long term capital gains are subject to 15% tax for most individual taxpayers.
So what is the significance of the different distribution type of dividends you always see out there? Let’s take a look at each.
Taxable Income – These are dividends income received from the Singapore SPCs (Singapore Purpose Vehicle) who are tax residents of Singapore. These dividends will be one-tiered tax where they are being taxed at the company level and exempted in the hands of unitholders.
It gets more complicated if the Reits are holding foreign properties such as First Reit where you need to consider the tax implications of the Indonesian SPCs.
Tax-Exempt Income – These relate to the disposal of ordinary / redeemable preference shares in the SPCs where such capital gain tax are tax exempted in Singapore. Again, this will be exempted at the hands of the unitholders.
Capital – These represent a return of capital to the SPCs, who may choose to redeem on a periodic basis. Depending on the Reit’s distribution policy and earnings payout they choose to give out, a portion of the dividend may be returned as this would deferred the amount of tax to be paid and reduce the cost basis for the units, which translate into lower taxes and hence higher dividends for unitholders.
These are just some of the things that as management of the company you choose how much to give out to unitholders. Sustainable growth will require proper planning of each and every thing, including these very simple considerations to note about.
Now that you know, maybe you could pay a little more attention to these when companies announce their dividends next time. Sometimes, it pays to know more than just the DPU itself 😉
B : I am starting to learn REITS, so this article came in handy. So, does it means that the "Capital" portion of dividend is tax-exempted?
Cheers!
Hi Richard
Glad it helps 🙂
The Capital portion represents a return of capital to the Singapore SPCs which means tax is deferred and hence on a trust level it represents a cost savings for them. At the hand of the unitholders they are tax exempted 🙂
Hi B,
Thanks for the education. I have always wondered what are the difference of those items.
Cheers.
Hi PIF
Glad the article helps you 🙂
Hi B,
As usual, thanks for the sharing.
I find it amusing that REITs' dividends are often recorded up to five decimal places on the dollar. But now I know it makes a difference in the tax accounting. 🙂
Hi SRSI
Ahh yes that is another thing which is amusing.
Because the amount to reconcile is almost in millions (dividends being paid out), sometimes we will need to round up and reconcile between what we received as income from the Singapore SPCs versus what is being actually paid out to unitholders.
Tons of admin stuff for the employees 😉
Hi B,
Hope u can sheld light on the following questions.
1) Am I right to say that as long as the REIT pays out 90% of the distributable attributable to unit holders, the taxable income portion will be tax-exempt at REIT lvl?
2) In what cases will the dividend distribution type will fall under the capital?
Your help will be appreciated.
Kh
Hi KH
Yes, the current rule states that as long as Reits pay out at least 90% of their distributable income to unitholders, the amount of income distributed will be tax exempt at the Reit's level.
On your other question, Reits are a structured based platform which income ultimately comes in from SPC usually who held individual assets in their respective local books. By representing this as an return of capital (to the SPC), the amount of income they have to pay as taxes (if they are already not) will be deferred and further subject to the 90% rules when it comes.
Hi B,
do u mean the amount of tax that Singapore SPC have to pay can be deferred if they choose to redeem their redeemable preference shares ??
"Unitholders will not be subject to Singapore income tax on distributions made by First REIT out of its capital receipts, comprising amounts received from the redemption of redeemable preference shares in the Singapore SPCs. These distributions will be treated as return of capital for Singapore income tax purposes."
http://firstreit.listedcompany.com/singapore_tax_implications.html
kh
Hi KH
Apologies for missing on your follow up question.
Yes your understanding is right. Look at SPC as a form of individual company who has to pay taxes on income just like any other company. The return on capital simply means that they can defer to pay these taxes on income that they produce.
Thanks for the explanation =)
kh
Hi B,
You might have overlooked my above question. Hope you can answer on it.
Thanks!
Kh
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