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Kyith’s Unfiltered Take on Singapore Budget 2018

I’m glad I do not have to sit through that budget 2018.

For all the controversy over MAS paying influencers so that younger Singaporeans have a keener interest in the Singapore budget,  I genuine FEAR what are the drastic things that they will announce.

In the end, I  am pretty glad I have the help of friends from the HWZ MTC Chat and some private Chat helping me distill down what the government is going to give us and what the government would take from us.

There will be no summary to this article but my take is this is a very measured budget that does more to try and encourage profitable SME to reinvent their business. The theme here is less on family this year. A lot of the potentially big changes did not happen.

The budget, is not going to affect everyone of us equally, and can get pretty political. However, I would just like to take a look through some of the stuff that interests me or affected me. There will be a lot of areas that I did not go into, and perhaps content for the future.

Here is the less filtered, personal take on it.

Singapore REIT ETFs no longer subjected to 17% Corporate Tax on S-REITs Distributions

This is an odd item in the myriad of budget announcement but to me this is something big.

2 years ago, I wrote about how great it would be if we have some REIT ETF in Singapore to offer something

  1. Easy for the retail investors to understand
  2. Provide a mixture of capital gains and dividend income to create a total return
  3. Diversified within a sector to prevent single company blow ups
  4. Goes up with inflation generally
  5. Able to let investors periodically put their money into it without overthinking about non-systematic (single company) risk
  6. Allows investors to speculate on the sector easily

There are currently 3 such REIT ETF around:

  1. NikkoAM-StraitsTrading Asia ex Japan REIT ETF
  2. Phillip SGX APAC Dividend Leaders REIT ETF
  3. Lion-Phillip S-REIT ETF

The existing flaw with the current REIT ETFs is that as funds (ETF stands for exchange traded funds), any distributions made out by Singapore REITs (e.g. Frasers Centerpoint Trust, Capitaland Commercial Trust) to the Singapore REIT ETF mentioned above are subjected to the 17% Singapore Corporate Tax.

In this budget 2018, the tax transparency,which is reviewed every 5 years, are also applied to the Singapore REIT ETF.

This likely, removes that one big flaw, preventing people that use this ETF as a form of more passive sector diversified investment. This will apply from 1 Jul 2018 onwards.

Now that doesn’t mean that your dividend income from the REIT ETF will be bumped up by 17%. #1 and #2 of the ETF list is a mixture of international and local REITs. Those international REIT’s distribution are subjected to their countries dividend withholding tax (15% DTA for Australia, 0% HK, 0% Malaysia).

“Subject to Tax” Condition
To meet this condition, the specified foreign income received in Singapore must have been subject to tax in the foreign country from which the income is received.

If they are taxed at source, they will not be taxed when the money arrives back into Singapore. This is likely due to the tax treatment of foreign sourced income.

Based on the statement from IRAS:

  1. If you are an individual and Capitaland Commercial Trust declares $10 in dividends, you get $10
  2. If you are a REIT ETF and Capitaland Commercial Trust in the ETF declares $10 in dividends, you get $10
  3. If you are a REIT ETF and Goodman Group in Australia in the ETF declares A$10 in dividends, you get $8.50 ( 15% dividend withholding tax)
  4. If you are a corporation and you own Capitaland Commercial Trust, and it declares $10 in dividends, you get $9 (10% concession tax rate)

This will benefit Lion-Phillip S-REIT ETF the most since it is an S-REIT ETF.

I may just do an article on this if there are demand to know more about this.

SG Bonus of up to $300 for Singaporeans

Finance minister Heng Swee Kiat says this “reflects the Government’s long-standing commitment to share the fruits of Singapore’s development with Singaporeans”.

So they declared a $100 to $300 SG Bonus for Singaporeans. This is the part of the budget that differentiates Singaporeans from the non-Singaporeans.

Those that earned less than $28,000, who are likely retirees would get $300.

For working adults like myself, we would get $200. The high income earners would get $100.

I do wonder if this commitment to share the fruits of Singapore’s development is going to be a one time thingy or recurring thingy.

If we go back to past history these “money drops” comes in different names. The above GST Voucher cash payments is from Singapore budget 2017.

Not sure what it will be called next year.

The slight difference here is that this year’s money drop has some goodies for those that is not retireed.

In this time and age, $100-$300 do not have much lasting utility.  Those that are retired will get the most but even for the lowest income, this would last them for 1 month of their meal allowance.

For a working adult like myself, we never usually benefit from this money drops. For those earning $100,000 and above this is good for a meal.

No Income Tax Rebate

In last year’s budget, there was a income tax rebate:

A personal income tax rebate for taxpayers will be introduced this year, Finance Minister Heng Swee Keat announced in his Budget address on Monday (Feb 20, 2017).

The rebate, set at 20 per cent of tax payable for income earned in 2016, will be capped at $500.

People have short term memory, so this likely means that they will forget that this won’t be around any more.

If you pair it together with the $200 SG Bonus I will get, the SG Bonus is like a personal income tax rebate for us.

Imposing a 10 per cent increase in tobacco excise duty makes you look like you just want to Earn more money

Its almost every year we never fail to see the taxes or the duty on smoking rise.

This was packaged to discouraged smoking.

I am not a smoker. I do have smoker friends.

Now if you tell me if something is really bad, why not just ban it outright? Why do we wish to give people that freedom of choice (for context I actually don’t think tobacco and smoking featured super highly on an independent basis as something that will adversely hurt your long term health) if its really not good.

In the early days, under the guise of cleanliness, we banned chewing gums in Singapore. We could do the same.

Why we don’t do that is likely because there are more smokers, the government can earn more taxes, while they are comfortable to do that under the guise of a socially acceptable narrative.

What is missing this year is any disincentive to help with the much talked about diabetes situation. Some of us expect some tax on sugar. Honestly, if they do that, it also doesn’t help with the situation because sugar is also a bigger addiction, more people are addicted to sugar. Banning sugar outright, is bad for business in Singapore and taxing more would not help the situation because if you are addicted to sugar you would still want to get your fix.

It really depends on whether there is a willingness to stem the problem.

At Investment Moats, we don’t use sugar for a long time and life goes on.

GST in Singapore to be raised to 9% between 2021 and 2025

This is the big one.

And they treat this as some show by leaving it to the tail end of the budget 2018 to announce it.  Its like they are afraid that after they announced this, people won’t sit through the rest of the budget.

Well they did announced that GST will increase from 7% to 9%, but the twist is that it will not happen immediately between 2021 to 2025.

The exact timing of when the GST increase will kick in depends on the “state of the economy, how much our expenditures grow and how buoyant our existing taxes are”, said Mr Heng. “But I expect that we will need to do so earlier rather than later in the period,” he stated.

This is like what the Federal Reserve would do in the USA, where they provide some transparency in what are the parameters that they look at to ramp up, hold or ramp down the short term interest rates.  So when this will happen will depend on the expenditure of the government.

People don’t like shocks, so telling people in advance lets them plan for it.

The finance minister spend a lot of time telling us its not sustainable with the increasing costs that the money have to come out from somewhere. Mr Donald Low, Associate Dean at the Lee Kuan Yew School of Public Policy, believes that increasing the percentage of investment returns that contributes to the budget from 50% to 60-70% is conservative, yet enough to offset the need for GST increase:

Mr Low brought up an important point of why 50% of Net Investment Return Contributions. Is there a scientific way of deriving? I have some views on this but I think it is too long to write here. I will see if I an write something on this next time.

NIRC consists of up to 50% of 1) the investment returns on the net assets invested by GIC, MAS and Temasek and 2) up to 50% of the net investment return derived from past reserves from the remaining assets.

In any case Dollar and Sense also have some opinion about the “heat” of this GST on the lower and middle income versus the overall cohort.  You have got to accept that if they want to raise it, there is nothing much you can do about it.

By setting the GST hike to somewhere after 2021, the incumbent also avoided a slippery situation of going against the narrative that they are poor planners.

Back in 2015, during the general election, then finance minister Mr Tharman said that the revenue measures the Government had already undertaken would provide sufficiently for increased spending planned until the end of the decade.

Mr Low Thia Khiang of the Workers’ Party raised the possibility that the PAP will raised the GST after the PAP wins the election. The Prime Ministers rebuke is that PAP would be “mad” to raise taxes just because it had garnered a certain percentage of the votes.

PM Lee said: “I think it’s a strange psychology to think that this is a government which is only dying to do bad things to people… Do we look like that?

He said, “Raising, adjusting taxes is a very big decision. You consider it carefully, you discuss it thoroughly, and you do it only when you absolutely have to.”

He added, “What will make you need to raise GST? Profligate spending and irresponsible, unsustainable plans. That is what will hurt and require you to raise taxes and GST.”

Well it looks like we absolutely have to raise taxes according to them.

Yet today, Senior Minister of State for Finance and Law Indranee Rajah said in an interview: “There are a few other things we have explored as well … But GST is the one that will give you, over the long term, a sustained revenue of sufficient amount that will take care of our expenditure needs, for healthcare, infrastructure, security and education,”

So now I am getting very confuse whether it is absolutely something we have to or that there are other avenues. If this gives us a sufficient amount to take care of our expenditure needs in the past, then how come it needs to be raised? Unless she is referring to GST as a platform.

Either way, when they want to do something, it is not for us to say.

GST on Imported Digital Services

There will be taxes on important digital services. This has been in the narrative for the past few months so its nothing new.

What is vague is what constitute digital services.

According to Channel News Asia, this refers to business to business services and business to consumer services such as marketing, accounting, IT and management, video and music streaming, apps, listing fees on electronic marketplaces, software and online subscription fees.

From the looks of it, the pressure is on the vendors rather than the consumers, they will have increase compliance and administrative costs.

Marketplaces would have to report the fees they charge on listings. Your favorite streaming services will have to pay some more taxes.

I see this as a move so that the local service provides can compete fairer. It is also a good revenue stream as the population consumes more online services such as Spotify, Netflix, Apple iTunes. It is a way to cover their bases so that the government will not have some leakage here.

There are no signs that your purchases on Tao Bao will have to pay a layer of additional taxes.

Buyer’s Stamp Duty for Property Purchase Greater than $1 mil increased to 4%

People were secretly wondering if the government would drop some carrots by lowering the TDSR and ABSD. Instead, the budget increased the stamp duty on properties.

Properties that cost $1 mil and above are going to be subjected to an additional 1% stamp duty. This takes place immediately.

Mr Heng explained that one common suggestion is to tax the rich and higher-income more, or introduce wealth taxes like a capital gains tax. “This reflects a desire for a progressive system, with those with more contributing back to society,” he said.

“This is far, and it’s precisely what we’ve done over the years,” he added, explaining that personal income tax rates for top income brackets were increased in 2015, and a cap on personal income tax reliefs imposed in 2016.

In my opinion if the goal is to stop speculation, then this tax do not help much.

The following are the possible tax payable based on the property value of purchase:

  1. 1.5 mil = $5,000 more
  2. 3 mil  = $20,000
  3. 5 mil = $40,000

In the grand scheme of things, if you wish to purchase the property, $5,000 more is likely not going to be a strong de-motivator to delay your purchasing decision.

For those with a property more expensive then this, likely the extra stamp duty is not going to matter in the grand scheme of things. This is more of a tax system to ensure the government can earn more from the capital appreciation and transactions of properties in Singapore.

If they wish to dissuade an outright property tax, a tougher TDSR restriction, capital gains tax may be more applicable.

From what I heard in Australia, if you keep your houses less than a year, 100% of the capital tax gains go into your taxable income. You are then tax according to where you belong to in the tax bracket. If you keep it more than a year, 50% of the gains go into the taxable income.

In USA, they did something like a flexible MOP (minimum occupation period) where if you live in a home for 5 years, you may not need to pay taxes on the home upon sale.

There are many ways to do this. It may result in the tax system being a little more complex but if you wish to do some form of targeted anti-speculation it might be able to be done.

This BSD tweak does not look like it. It looks more like increasing the revenue stream based on the amount of private transactions.

Government Provides Incentives to Citizens to move near parents. More Grants for Singles Finally

For some time, the housing policies were geared towards forming a family nucleus. There were less support for singles to own housing.

This years budget at least provides some incentives for the singles who wish to stay close to his/her parents to support them.

  1. Currently, eligible singles who buy a resale flat to live with their parents receive a Proximity Housing Grant (PHG) of S$10,000. This has been bumped up to S$15,000
  2. Now, eligible singles who buy a resale flat to live near their parents will also receive a PHG of S$10,000
  3. Families buying a resale flat to live with their parents or children will also benefit from an increased PHG of S$30,000, up from S$20,000 currently. Those buying a resale flat near their parents or children will continue to receive a PHG of S$20,000
  4. Currently, the proximity condition is defined as living in the same town, or within 2km. But this will be revised to “within 4km”, to give applicants more choices when choosing a resale flat to live near their loved ones, including flats in nearby towns

This is good news to the singles but as a Single it does not provide super incentives to do it. If my parents stay in Bukit Merah and they are old, the housing prices over there are so high, versus other areas such as the swamps of Seng Kang, that the $5,000 to $10,000 looks like a subsidy for my renovation expenses.

I would still need to bear a large part of the cost if I wish to stay independent. The increased in proximity, while good will still limit to within the estate.

The qualitative considerations to stay nearer to parents will feature more in my considerations to be near them. There is less of an incentive if its about me getting a good place to live due to the duration of the lease. From an investment angle, I would choose a place that appreciates better given the size of the grants that I could receive from the government.

S&CC rebates

This is a goody every year it seems.

As someone staying in a 5 room flat, we usually get very little subsidy. However, given that I can choose to live in a 3 or 4 room, the rebates here is not a lot of difference. These rebates and vouchers are meant more for those where this small amount is a larger percentage of their annual expenses.

Foreign Domestic Worker Levy Goes Up

Over the past 10 years, the number of foreign domestic workers have gone up 40% to 240,000. The government would like us to be less dependent on them.

So they are:

  1. Increasing the monthly domestic levy from $265/mth to $300/mth (13% increase, $420 more annually)
  2. Increasing the monthly domestic levy for a second and subsequent maid from $265/mth to $450/mth (a 70% increase, $2,730 more annually)
  3. Families that need help caring for young children under the age of 16, the elderly, or relatives with disabilities qualify for the concessionary rate of S$60/mth. About 80 per cent of Singaporean maid employers benefit from this concession

It looks like for young family and those family with elderly parents, things are still OK.

This is something that I nearly benefited from last year.

Again, like the BSD this looks like a surgical strike to increase the income on those that can afford it.

The government will pilot a new financial education curriculum for polytechnic universities

Now this is buried deep within the information.

It makes me wonder whether our youths are so worrisome with their money that we need a curriculum for it.

My take for financial education is always, if you are not ready, meaning you don’t have your own money to manage, people do not value it as highly.

But that doesn’t mean that you cannot interest them to think about their relationship with money.

This requires something innovative, something niche and a lot of the focus on the incentives and the why.

Its not a good thing if everyone is financially prudent though. Who will spend in that case?

At the end of the day, not everyone will be financially savvy no matter how hard we try. But nevertheless, more readers, more interest is good for Investment Moats!

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Thursday 22nd of February 2018

"If you pair it together with the $200 SG Bonus I will get, the SG Bonus is like a personal income tax rebate for us."

The personal income tax rebate benefits the middle class, while the SG Bonus and the GST Vouchers and S&CC Rebates are more targeted to benefit the poor.

So there is a key difference. This year's budget has nothing direct for the middle class, except the indirect "help" via funding subsidies to better oneself for the future.


Thursday 22nd of February 2018

Hi Prataboy, thanks for the contribution. I agree that not much is for the middle class. We are still going to be the main driver here.


Wednesday 21st of February 2018

Given the trend of raising interest rates, does it still make sense to invest in REIT ETF or individual Reit? i observed that Reits fall quite severe during recent correction. What strategy would you propose to capitalize on raising interest rates?


Wednesday 21st of February 2018

Well the banks do well during these kind of circumstances. The REITs do not do so well but if they are beaten down such that the rising rentals provides an attractive yield, they will become attrative again. The key is to identify when you should buy which.


Wednesday 21st of February 2018

I look forward to your article on Lion-Phillip S-REIT ETF benefiting from budget 2018 . Thank you


Wednesday 21st of February 2018

hi guys, hope i can find the bandwidth to write.


Wednesday 21st of February 2018

looking for ward to your SREIT ETF write up..


Wednesday 21st of February 2018

FYI, goodies like GST voucher, U-save, and S&CC rebates have been more or less "permanent" since 1 or 2 years ago (I believe PM or FinMin mentioned this in one of their speeches). The only variable is the quantum. Before 2016, they were angled more as "surprise" goodies .... now they are built-in as "normal".

No surprise regarding GST increase. They have to do it after the next GE, after PM's & Tharman's very public proclamations in 2015 that govt remains very well funded till "end of this decade" i.e. 2020, and that there will be "no GST increase during this term of govt".

I would say the only (pleasant) surprise was the tax transparency treatment for SREIT ETFs. Kudos to both SGX & MAS for talking to IRAS since 2015 on this. Besides Lion-Phillip SREIT ETF, the other main benefactor will be Nikko-ST Asia ex-Jap REIT ETF, as that one also has quite a high percentage of SREITs.

I can see these REIT ETFs being on my "fire-and-forget" bucket list during the next severe bear market. Just dump in a sizeable amount of monies after prices have dropped -40% or -50% and simply ride the survivorship-bias structure of ETFs & the eventual recovery for long-term income streams.


Wednesday 21st of February 2018

Hi Sinkie, Happy chinese new year to you. I like the line of simply ride the survivorship bias structure of ETFs. Very well said.

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