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How are individual REIT holders taxed?
Repost of publication on The Sun Daily on 19 July 2021.
LAST WEEK, I have discussed the tax treatment of the distribution of unit trust at the hands of unit holders. Today, the focus will be on real estate investment trusts (REIT) that are approved by the Securities Commission and listed on Bursa Malaysia. The REIT market has significantly grown since it was introduced in 2005.
According to the Securities Commission Malaysia Annual Report 2020, there were 18 REITs listed on the Main Market of Bursa Malaysia with a total market capitalisation of RM39.34 billion as at Dec 31, 2020.
As its name suggests, a REIT is a fund which invests and manages a portfolio of income-generating real estate. The benefit of investing in a REIT is that individual investors could effectively own a portion of real estate for a fraction of the cost.
The underlying assets of the REITs are managed by experienced professionals who can identify potential real estate investments and to maximise the income earned from such real estate investments.
What is a REIT?
A REIT consists of a relationship among four parties. The unit holders are the investors that have the rights to the fund's real estate investment. The REIT manager is responsible for the acquisition and divestment of the REIT's properties.
The property manager is typically appointed by the REIT manager to oversee the REIT's investments which includes finding the best tenants to lease the property, to run programmes to attract customers to the property, and to maintain the property.
The trustee holds the assets on behalf of the unit holders and ensures the rights and assets of the unit holders are safeguarded.
A REIT mainly earns rental income from leasing out its properties. It may also earn income from fixed deposits or selling its real estate investments. A REIT needs to pay tax on any taxable income earned during the year at a rate of 24% unless it distributes at least 90% of its total income to the unit holders during the year.
Even though a REIT is exempted from tax by distributing at least 90% of its total income during the year, the distribution made to the unit holders will be subject to withholding tax and will be received by the unit holders net of tax. The withholding tax rate for individuals is 10%. This is a final tax and there is no need to declare this in the personal tax return of the unit holders.
Taxation of unit holders of REITs distributing less than 90% of their total income
REITs distributing less than 90% of their total income will pay tax at 24%. In such cases, the distribution to the individual unit holders will carry a share of the tax credit which will be available for set-off against the income tax chargeable on the distribution received from the REIT.
The individual will be subjected to tax on scale rates ranging from 0% to 30% depending on their income received during the year and will have to declare such income in their annual income tax returns.
Any exempt income received and distributed by the REIT will also be tax exempt at the hands of the unit holders such as single-tier dividends, certain types of interest and gains from disposal of investments.
Unit holders who sell their units will not be taxable on the sale or redemption of the units on the grounds that it is capital gains.