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A 17% Withholding Tax is not making a SGX S-REIT 20 ETF Viable

I wrote not too long ago why its strange fund companies do not come up with a non-synthetic index fund that tracks a basket of REITs in Singapore (Read Why A Singapore SGX S-REIT 20 ETF is Good for Singaporeans to Build Cash Flow Wealth and Financial Independence)

When I went to the REITs Symposium 2016, it is heartening to hear SGX’s Head of Research and Products Chan Kum Kong say that they are moving forward with this.

And hopefully, they have something to offer in the second half of 2016.

However, when more details were revealed, it seems that there is an explanation why such an ETF have not been brought to market.

A senior executive at an asset management fund who is looking into issuing an S-Reit ETF told BT: “The thing is that, right now, the tax regulation in Singapore is such that any Singapore fund which buys into an S-Reit will have to pay a 17 per cent withholding tax when it gets dividends. Individual investors, in contrast, do not get taxed on S-Reit dividends.”

The executive and his fund declined to be named. “So the situation is that it would be an administrative issue if we have to pay the tax on every dividend we collect,” the executive added.

One way to mitigate the issue would be for the Inland Revenue Authority of Singapore (IRAS) to waive the withholding tax when dividends are paid out by the Reits, and instead arrange for the tax to be collected at the ETF level.

Such a taxation structure “can be done, on a practical basis, and IRAS doesn’t lose any revenue”, the executive said.

This coincide with what I have been told from other sources why so far, there is little incentive for unit trusts to form a REIT theme fund (except Phillip Capital who came up with one)

Dividends are a large part of most REIT’s payout, and if a 17% withholding tax is levied on the ETF, it will be very detrimental to investor’s returns.

An 6% dividend would become 4.98%.

If this is the case, would you still invest in a REIT ETF with its profile of advantages?

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yr

Sunday 12th of November 2017

Does this mean that 17% withholding tax is levied on dividends received for the STI ETF as well?

Kyith

Sunday 12th of November 2017

Hi yr, technically yes, since it affects all corporates and funds. but for STI ETF we struggle to see where the corporate tax is.

momo

Friday 24th of June 2016

That's not how the HWZ guys interpreted it. Check out the posts in the HWZ thread. They seem to think that "any Singapore fund" in the quote refers to "any Singapore corporate investor".

Kyith

Saturday 25th of June 2016

hi momo,

they seem to think there won't be any tax. i beg to differ, but its solely based on my interpretation. we know that singaporeans do not get tax on div, but a fund does. I know that because after i wrote the first article, someone privately shared with me what his PE friend who wonders teh same thing but are in the fund world tells him.

if you tie up this, the guy is saying so that IRAS won't lose any revenue, which means they still earn. the question here is: does a fund breaks up the withholding tax for different owners in a unit trust? i will have to ask my advisor

Teo

Tuesday 21st of June 2016

Ah so that's why! At 17% Withholding Tax? Definitely not! Investing in ETFs to me provide one key benefit, the ease of diversification and the major concerns I look into are the tracking error and expense ratio. If there's a withholding tax of 17%, that would add on significant cost of earnings. Though, I can see that some might consider especially if they're not looking to invest a sum large enough to make a diversified purchase of 20 different reits viable. Breakeven at most local brokers is about $28 fees and that requires approx $10k~ investments per reit. Meaning only at $200k and above people will start to reap the benefits of buying individually. That's plenty!

Kyith

Tuesday 21st of June 2016

It will be interesting to see how they address this issue.

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