The Different Structure & Dividend Distribution Type From Reits

I received one or two queries on this recently so I thought it’s good to make this as sticky post for future reference.

Real Estate Investment Trust (Reits) is not technically structured as a pure company that owns businesses or assets. They are being structured as an investment holding entity which requires a Trust Deed between the Trustee and the Reit manager. 

In order to own an asset locally or overseas, they need to set up a Special Purpose Vehicle (SPV) which acts in the context of a company that can buy or sell businesses or assets and legally had to file for their own respective corporate tax return. If the Reits own an asset overseas, the situation is made more complex because it has to set up a second layer SPV in that particular country to make the transaction and legally file for that country tax return. The transaction is then made between the Singapore SPV and that overseas SPV.

As investors, you also probably don’t really bother with this but there are also the different Dividend Distribution Type for Reits just for information. Let me break that down.

First Reit is a healthcare Reit which owns hospitals across Singapore, Indonesia, Japan, South Korea.

In the latest distribution, they had distributed out a total of 2.14 cents per unit, which made up of 0.07 cents (Taxable Income), 1.17 cents (Tax-Exempt Income) and 0.90 cents (Capital).

Taxable Income

These are the income that the trust received from the Singapore SPVs.

If you are a tax resident here, these distributions will be exempt in the hands of the individual shareholders since the regulations have regulate to do a one-tiered tax on this. In other words, it has been “taxed” from the SPV corporate level.

You can see why First Reit has only minimal taxable income distribution as their income derived from assets are mostly not derived from Singapore.

Tax-Exempt Income

These are the income that the trust received from the foreign set-up SPVs.

These also include any disposal of ordinary / redeemable preference shares where such capital gain tax are exempted in Singapore.

Tax-Exempt Income distribution is exempt from the Singapore income tax in the hands of all unitholders.

You can see the majority of the income for First Reit is derived from this one.

Capital

These represents a return of capital back to the respective SPVs, who may choose to redeem on a periodic basis.

You can try to look at SPVs like any other company, where depending on the Reit’s distribution policy and payout, a portion of the dividend may be returned back to the SPV and they can use this to defer the amount of taxes on the income that they produced, hence translating into lower taxes and therefore higher dividends for the unitholders.

Another example is Capitalmall Trust (CMT), which has decided to distribute all 100% of its taxable income to unitholders, which translate to 2.73 cents per unit.

Many investors know that Reits have to distribute at least 90% in order to enjoy tax exempt status from IRAS but little know that these 90% are specifically referring to the taxable income, NOT on the tax exempt and capital portion.

Take CMT for instance, they had received tax exempt and capital distribution for income received from Capital Retail China Trust (CRCT) in the first quarter amounting to $12.9m, which they had used to retain for their running working capital expenses. 

Good management typically plan well on how much distributions to give out and how much they would need to retain for their day to day operations and also growth plans.

Hope the above helps.

Vested in both First Reit and Capitalmall Trust.

Thanks for reading.