Let’s take the announcement details by First Reit which was announced a few weeks ago.
There are 3 different distributional type of dividends that were declared.
The first is taxable income which amounted to 0.07 cents/share and is a choice.
The second is tax-exempt income which amounted to 1.02 cents/share and is a mandatory.
The third is a capital distribution which amounted to 0.77 cents/share.
It sums up to a total of 1.87 cents/share declared.
Taxable Income – These dividends declared are by choice since it is taxable in nature. These are dividends that the trust received from its’ respective SPCs (Special Purpose Vehicle) which are tax residents of Singapore.
The dividends will be taxed at the company level but exempted in the hands of unitholders based on the one-tiered rule. For foreign trust like First Reit who derived their income from a foreign SPCs, It will further be subjected to the withholding tax in their respective holding country.
Tax-Exempt Income – These income relates to the disposal of ordinary / redeemable preference shares in the SPCs where such capital gain tax are tax exempted in Singapore. This is also usually the bigger portion and one which many Reits are currently withholding the distribution in lieu of the Covid situation after MAS ruling was allowed.
Capital – These income represents a return of capital to the respective 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.