Singapore Budget 2018: Reit ETFs to enjoy tax transparency

Singapore

TAX transparency treatment for Singapore-listed real estate investment trusts (S-Reits) will soon be extended to exchange traded funds (ETFs) invested in these Reits - a long-awaited move cheered by market watchers.

Taking effect on or after July 1, the tax concessions for Reit ETFs will ensure parity in tax treatments between investing in individual S-Reits and Reit ETFs.

Industry players noted that the much-lobbied move is positive for the growth of the Reits sector and will strengthen Singapore's status as a Reits listing hub.

PwC real estate and hospitality tax leader Teo Wee Hwee reckoned that this will encourage the growth of more Singapore listings of Reit ETFs.

Vijay Natarajan, property and Reits analyst at RHB Research Institute Singapore, also said he expects more Reit ETF-based products to hit the market in the near term. "The move will also help broaden the investor base for S-Reits as more international institutional investors will be able to invest in S-Reits via the ETFs in a tax-efficient manner," he added.

Tax leakage in the Reit ETF structure has been the chief gripe among investors and issuers of Reit ETFs, with the relevant authorities said to be in discussions to address this since 2016.

Without tax transparency treatment, distributions from S-Reits to ETFs are subject to a withholding tax of 17 per cent even though they are distributed tax-free to the ETF investors.

The tax leakage in Reit ETFs leaves individual investors and foreign corporate investors worse-off investing in Reit ETFs than investing directly in Reits, since individuals are tax-exempted on distributions from Reits while foreign corporate investors pay a lower 10 per cent tax on Reits' distributions.

So far, three Reit ETFs have been listed here have a combined S$250 million in assets under management and yield above 4 per cent per annum after management fees. S-Reits, however, are yielding 6 per cent on average.

Jeffrey Lee, managing director and chief investment officer at Phillip Capital Management, posited that the extension of tax transparency to Reit ETFs could significantly enhance the ETFs' yields.

Besides extending tax transparency treatment to Reit ETFs, the government is also introducing a 10 per cent concessionary tax rate on Reit ETFs' distributions received by qualifying foreign corporate individuals. This brings the tax rate they pay on the distributions they receive from Reit ETFs on par with the tax rate they pay on Reits' distributions.

Further details will be released by the Monetary Authority of Singapore and the Inland Revenue Authority of Singapore by March.

The government is working on a tax framework for Singapore Variable Capital Companies (S-VACCs), aimed at encouraging asset managers to consolidate their operations in Singapore by domiciling more of their funds here. More details on S-VACCs will be released by October. The structure was first proposed last year as a new structure for collective investment schemes when the government sought industry feedback during a public consultation exercise.

An S-VACC will be treated as a company and a single entity for tax purposes. It can accommodate a variety of traditional and alternative asset classes and investment strategies.

The existing tax exemptions on qualifying funds, the 10 per cent concessionary tax rate for fund managers under the Financial Sector Incentive (FSI) scheme, and the existing GST remission for funds will also be extended to S-VACCs.

KPMG Singapore tax partner Leonard Ong noted that these extensions will be a welcome cheer to the funds and fund management industry. "This will enable the industries to be more comprehensive in the funds space, and more competitive in attracting foreign funds to be managed here in Singapore," he said. "However, as the S-VACC is new, we look forward to further details on the tax framework that MAS will be releasing in October."

Mr Teo said he is hoping the government will consider S-VACC as a viable structure for listed Reits too, as he believes this could result in greater tax efficiency for Reits with overseas investment properties.

To cater for more diverse fund structures, the government said that tax exemption under the Enhanced-Tier Fund scheme for companies, trusts and limited partnerships will also be extended to fund vehicles of all forms, if they meet all qualifying conditions. Further details of the change will be out by May.

Other "carrots" for the fund management sector announced in the Budget include the extension of tax incentive schemes for fund managers under the FSI and for approved special purpose vehicle (ASPV) engaged in asset securitisations.

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