MRMA Taxation of REIT


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MRMA 1 QTR Meeting

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MRMA Taxation of REIT

  1. 1. Presentation to MRMA 4 April 2013
  2. 2. Objectives► 1) Application of withholding tax under Section109D of the ITA► 2) Benefit of claiming of capital allowance and/or industrial building allowance (IBA) at REIT levelPage 2
  3. 3. Real Estate Investment Trust (REIT) Background Ø REIT is a special type of unit trust fund that invests 50% of its total assets in real estate or single-purpose companies at all times based on the SC Guidelines Ø IRB issued the following Public Rulings to replace the old Guidelines issued on 29 June 2005: 1) Public Ruling No. 7/2012 – Taxation of unit holders of real estate investment trusts / property trust funds 2) Public Ruling No. 8/2012 – Real estate investment trusts / property trust funds – an overview 3) Public Ruling No. 9/2012 – Taxation of real estate investment trusts / property trust fundsPage 3
  4. 4. Real Estate Investment Trust (REIT) Background Ø A key feature of the REITs concept is its tax transparency status provided under the Malaysian tax system, whereby the income of REITs is only taxed at the unit holders level (upon receipt of the distribution of income). The flow through concept enhances the amount of income received by a unit holder. However, to qualify for this tax transparent status, REITs are required to distribute 90% or more of its total income to unit holders Ø To enjoy the above tax exemption, a REIT must be approved by the Securities CommissionPage 4
  5. 5. Real Estate Investment Trust (REIT) (Cont’d)1) Deduction of tax on the distribution of income of a unit trust – Section 109D of the Income Tax Act 1967 (ITA) ► (1) – This section shall only apply to income of a unit trust which is exempt under section 61A ► (2) – Where a unit trust (in this section referred to as the payer) distributes income to a unit holder other than a unit holder which is a resident company which is deemed to be derived from Malaysia, the payer shall upon distributing the income, deduct therefrom tax at the rate applicable to such income and shall within one month after distributing such income, render an account and pay the amount of that tax to the Director General: Provided that the Director General may under special circumstances allow extension of time for tax deducted to be paid over.Page 5
  6. 6. Real Estate Investment Trust (REIT) (Cont’d)2) Exemption of real estate investment trust - s61A(1) of the ITA► Section 61A(1) – Where in the basis period for a year of assessment ninety per cent or more of the total income of the unit trust is distributed to the unit holder, the total income of the unit trust for that year of assessment shall be exempt from taxPage 6
  7. 7. Real Estate Investment Trust (REIT)(Cont’d)3) Special treatment of rent from the letting of real property of a real estate investment trust – s63C of ITA► Section 63C(2) – Where in the year of assessment, income of a unit trust consists of a rent from the letting of real property, the amount of the rent shall be treated as gross income of a unit trust from a source consisting of a business for that year of assessment.► Section 63C(3) – Ascertainment of adjusted income Note: Excess expenditure/losses cannot be carried forward► Section 63C(4) – Ascertainment of statutory income Note: Unabsorbed allowances cannot be carried forwardPage 7
  8. 8. Real Estate Investment Trust (REIT)(Cont’d)4) Rates of tax – Section 6(1)(i) of ITA► Subject to Section 109D but notwithstanding any other provisions of this Act, income tax shall be charged for each year of assessment upon the income of a unit holder other than a unit holder which is a resident company which consists of income distributed by the unit trust referred to Section 61A at the appropriate rate as specified under Part X of Schedule 1 …Page 8
  9. 9. Application of withholding tax Section 109D ofITA (Cont’d) ► Part X, Schedule 1 of ITA - summary of the relevant tax rates Chargeable person YA 2009 to 2016 Type of tax Rate (A) Company (i) Resident Corporate 25% (YA2009 onwards) (ii) Non-resident WHT (final tax) 25% (YA2009 onwards) (B) Foreign Institutional Investor * WHT (final tax) 10% (C) Individual (i) Resident WHT (final tax) 10% (ii) Non-resident WHT (final tax) 10% (D) Others (i) Resident WHT (final tax) 10% (ii) Non-resident WHT (final tax) 10% * “institutional investor” means a pension fund, collective investment scheme or such other person approved by the Minister of FinancePage 9
  10. 10. Benefit of claiming of capital allowance and/orIBA at REIT level Ø For a REIT to claim capital allowance/IBA, qualifying capital expenditure must be incurred Ø The claiming of capital allowance under Schedule 3 of ITA is granted to a REIT in order to arrive at statutory income/total income Ø Statutory income/total income of a REIT is then compared with the actual distribution to unit holders to determine whether it meets the 90% threshold as provided under Section 61A of ITA Note: In the case of REIT, statutory income is regarded as total income if there is no further claim of approved donation, etc as provided under Section 44 of ITA (Definition of total income)Page 10
  11. 11. Computation of statutory income/total income atREIT level Example: At REIT level RM (‘000) Gross business income - rental (Section 63C(2) ITA) 100,000 (Less): Allowable expenses (Section 63C(3) ITA) (20,000) Adjusted income 80,000 (Less): Schedule 3 allowances (Section 63C(4) ITA) (50,000) Statutory income/Total income 30,000 Actual distribution to unit holders 28,000 % of distribution (28,000/30,000 x 100%) 93.33% Note: Where Schedule 3 allowance has been claimed on qualifying asset and subsequently disposed of, calculation of balancing charge is applicable (subject to amount of allowances claimed). The balancing charge will increase the total income.Page 11
  12. 12. Application of withholding tax Section 109D ofITA ► S109D(1) apply to income of a unit trust which is exempted under S61A ► Where a REIT (payer) is tax-exempted under S61A of the ITA (distribute 90% or more of the REIT’s total income in the basis year for a year of assessment), the payer is required to deduct tax at the rate applicable to such income, pursuant to S109D of the ITA At REIT level Scenario 1 Scenario 2 1) Distribution to units holders RM28,000 RM40,000 2) Statutory income/total income RM30,000 RM30,000 3) % of distribution 93.33% 133.33% Distribution of income subject to RM28,000 RM30,000 109D WHT ► For Scenario 2, since the actual distribution is of more than total income, only the total income which is exempted from tax under S61A is subject to S109D withholding tax. The excess of RM10,000 is regarded as non taxable income in the hands of the unit holdersPage 12
  13. 13. Application of withholding tax Section 109D ofITA (Cont’d) Specimen income distribution format in a voucherPage 13
  14. 14. DisclaimerThis presentation contains information in summaryform and is therefore intended for general guidanceonly. It is not intended to be a substitute for detailedresearch or the exercise of professional judgement.Neither Ernst & Young Tax Consultants Sdn Bhd norany other member of the global Ernst & Youngorganisation can accept any responsibility for lossoccasioned to any person acting or refraining fromaction as a result of any material in this presentation.On any specific matter, reference should be made tothe appropriate advisor.
  15. 15. Thank you