Reits seek cut in payout to as low as 50%

Source : Business Times - 22 Jan 2009

Some real estate investment trust (Reit) managers have urged the government to reduce the minimum payout ratio to Reit unitholders to as low as 50 per cent, from 90 per cent now, while still allowing the trusts to enjoy tax concessions.

And they have even proposed a tax holiday on distributable income that they do not pay out.

The suggestions are aimed at helping Reits conserve cash to get them through today’s tight credit market conditions, BT understands.

Reits have to pay out at least 90 per cent of their distributable income to unitholders to enjoy tax transparency on the amount that they pay out. For example, if a Reit makes $100 million of distributable income in a year and pays out $90 million to unitholders, it does not pay corporate tax of 18 per cent at the Reit/vehicle level on the $90 million.

However, it has to pay tax on the $10 million that it withholds. If a Reit distributes all $100 million, then it does not pay any tax on its income for the year.

Instead, Reit unitholders are liable to be taxed on the distributions that they receive, depending on their profile. This ranges from zero tax for individual investors regardless of nationality, to 10 per cent for foreign corporate/institutional investors and 18 per cent for local corporate investors.

Reit managers have been giving a variety of feedback to the Monetary Authority of Singapore. One request is to reduce the minimum payout ratio from 90 per cent of distributable income to anything from 50 to 75 per cent, BT believes.

The Reits also want MAS to continue according them tax transparency, that is, to keep exempting them from paying corporate tax on the portion of income that they pay unitholders, even at a lower payout ratio. Some are even urging MAS to go a step further and grant Reits a tax holiday on the income that they withhold from distribution.

Market watchers say that this would lead to a substantial loss of tax revenue. To address this concern, some Reit managers have suggested that the tax holiday on income that is not distributed could be limited to, say, two years to help Reits ride out the current tough environment. Agreeing, an analyst suggested that Reits could be required to pay back taxes after the two-year period expires. By then, hopefully, things will be better.

MAS is understood to have sought the views of a gamut of parties - including Reit managers, bankers, lawyers and even unitholders - on the topic.

Among the issues is fairness in tax treatment in relation to other listed and non-listed entities. ‘Why should Reits continue to enjoy exemption of corporate tax at the vehicle level if their distribution payout ratios fall, when many other listed companies also distribute a chunk of their profits to shareholders but still have to pay corporate taxes?’ asked an industry observer.

Some Reit unitholders may not be happy with a lower distribution payout ratio, as it will create more uncertainty about returns. This could be a bugbear, especially for corporate investors such as funds and insurance companies that have obligations to achieve target returns for their own investors and policy holders.

The counter-argument is that, in times like these, the survival of Reits must be paramount. As OCBC Investment Research said this week: ‘While this may create income uncertainty for investors, we think the first priority is to ensure Reit survival and dividend sustainability. We note that a minimal cut from 90 per cent to say, a 75 per cent payout ratio requirement, is not a silver bullet for Singapore Reits with significant liquidity issues. But Reit managers may like to have as much flexibility and (cash) ammunition as they can get in the current environment.’