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 ;)
