By Tan Hui Cheng, Tax Partner & Jocelyn Ng, Tax Manager, PwC Singapore
The Singapore Budget this year introduced some tax changes that will potentially benefit investors in Singapore unit trusts.
While investors often consider factors such as potential investment returns and risks involved, tax implications are rarely part of a retail investor’s investment decision-making process. This is understandably so because investment income is generally tax-free to a Singapore individual investor. As a result, an area that is often overlooked is that the various tax incentives available to a Singapore unit trust can result in different tax consequences, and therefore the overall returns, for the investors.
In this article, we discuss some of the potential impact of the Budget 2014 changes to investors and fund managers of unit trusts in Singapore.
The Designated Unit Trust Scheme (“DUT Scheme”) is a popular scheme used by fund managers for Singapore retail unit trusts, as it confers various tax benefits. Unit trusts on the DUT Scheme do not pay tax on their qualifying income. The related distributions to individual investors are also exempt from tax. Singapore corporate investors, on the other hand, are taxed on distributions received from such unit trusts. Fund managers are taxed at the normal tax rate on the fees received for managing these unit trusts.
Retail unit trusts (i.e. those open to the public for subscription) and certain non-retail unit trusts targeted at institutional and sophisticated investors are allowed to apply for the DUT Scheme.
Several changes were introduced in Budget 2014, including:
What do these changes mean for investors and fund managers?
The Budget changes present a timely opportunity for fund managers to consider which of the various tax incentives will maximise the tax benefits to the unit trust and consequently maximise the returns to investors.
Singapore retail unit trusts can choose to make use of the DUT Scheme, the Enhanced-tier Fund Tax Incentive Scheme (“ETF Scheme”) and possibly the Offshore Fund Scheme now that this has been extended to unit trusts with Singapore trustees. Non-retail unit trusts have only the option of the latter two incentives going forward. The key conditions and benefits of the three incentives are set out in the table below.
a) For the investor
What does it mean for an investor if a unit trust is on one tax incentive rather than another?
Firstly, the scope of tax exempt income for the ETF Scheme and Offshore Fund Scheme is generally broader than that for the DUT Scheme. This makes the ETF Scheme and Offshore Fund Scheme more attractive as more income will be exempt from tax and be available for distribution to the investors of unit trusts on these incentives.
Secondly, Singapore corporate investors in unit trusts on the ETF Scheme and Offshore Fund Scheme are better off, tax wise, than those investing in unit trusts on the DUT Scheme. Singapore corporate investors possibly do not have to pay any taxes on the distributions received from a unit trust on the ETF Scheme or Offshore Fund Scheme but they will be taxed on distributions from a unit trust on the DUT Scheme.
The fund manager’s choice of tax incentive for the unit trust can thus affect the net returns on the investment to investors.
b) For the fund manager
The various tax incentives also result in different consequences for the fund managers of the unit trusts.
Fund managers which have the Financial Sector Incentive for Fund Management (FSI-FM) can enjoy more certainty on the availability of the concessionary tax rate of 10% on the fees from managing unit trusts on the ETF Scheme and Offshore Fund Scheme vis-à-vis the DUT Scheme.
They also have less administrative obligations to fulfil in respect of a unit trust on the ETF Scheme or Offshore Fund Scheme. Unlike the DUT Scheme which requires the unit trust to file a statement to the Inland Revenue Authority of Singapore (IRAS) for every distribution made, the ETF Scheme and Offshore Fund Scheme do not have such a requirement.
As with all things in life, there is no free lunch. With more benefits granted, there are naturally more stringent conditions and potential downside to consider under the ETF Scheme and Offshore Scheme. For example, the ETF Scheme requires the unit trust to have a minimum fund size of S$50 million at the point of application for the scheme, while the Offshore Fund Scheme imposes restrictions on the profile of investors. The fund manager needs to consider whether the unit trust is likely to be able to fulfil the ETF Scheme conditions on an on-going basis such as the minimum annual local business spending. Failure to do so means that the unit trust will be taxed on its income for that year, which could otherwise have been exempted from tax if the unit trust had made use of the other incentives. This has not been an issue for unit trusts on the DUT Scheme, as its conditions are not as stringent.
What next for fund managers of Singapore unit trusts?
Given the more attractive financial outcome under the ETF Scheme and Offshore Fund Scheme, it would be sensible for fund managers to carry out a cost-benefit analysis to determine whether it would make sense to rely on these incentives instead for the unit trusts they manage.
Factors such as fund size, profile of investors, and scope of income derived by the unit trust in question would have to be considered to assess which incentive would be most beneficial to the unit trust and its investors.
Of course, it will be necessary to await further details on the Budget 2014 changes to be released by the Monetary Authority of Singapore (MAS) (expected by end May 2014), before drawing final conclusions. However, this should not stop fund managers from commencing the analysis now.
As the saying goes, the devil lies in the details. The Budget 2014 changes for unit trusts in Singapore are generally positive. It is hoped that the authorities will continue on this positive note. It will be heartening news if the details of the Budget changes and transitional requirements for a unit trust changing from one incentive to another are practical and take into account business realities.
Table – Comparison of key conditions and benefits of tax schemes for Singapore unit trusts
|DUT Scheme||ETF Scheme||Offshore Fund Scheme|
|Compliance requirements||Statement of Distributable Income (SODI) and tax vouchers||Annual declaration to be made to the MAS||Annual statements to investors and declaration to IRAS on non-qualifying investors|
|Application for scheme||Not required from 1 September 2014||To MAS||Not required|
|Minimum fund size||None||Minimum fund size at point of application and minimum annual local business spending||None|
|Scope of tax exempt income||Not as broad||Broader - Specified income (SI) from designated investments (DI)||Broader - SI from DI|
|Treatment of distributions for investors||Taxable for certain investors, e.g. resident companies||Based on clarification from the authorities, the distributions paid out of SI should be exempt for all investors||Pending details, but expected to be exempt for all investors|
|Financial penalty on investors||None||None||On non-qualifying investors|
|Restriction on investors||None||None||Cannot be 100% Singapore investors|
|Treatment of management fee income under FSI-FM for fund manager||Cannot qualify if the fees are borne by Singapore investors||Qualifies for FSI-FM||
Qualifies for FSI-FM provided there are no non-qualifying investors
Note: This table has been prepared for general guidance on matters of interest only, and is not intended to be comprehensive.