1.

INTRODUCTION

Real Estate Investment Trust (REIT) is a special type of unit trust that invests or purposes to invest at least 50% of its total assets in real estate, which includes land, buildings or share and bonds in Real Estate Company. REIT is also known as property trust fund. Rental income is its main source of income. REIT must be approved by Securities Commission. It will be accorded a preferential treatment. This takes effect from YA 2005. [S 61A] The basis period for a YA for REIT will be the financial year end, which may be 31 December or non 31 December. 2.0 RENTAL INCOME

Rental income from the letting of real property is a business source. Any outgoings and expenses incurred in respect of the business are deductible. However, the excess of expenses over income is not allowed to be set off in the current year or carried forward to next YA. It is thus a permanent loss [S 63C(3)]. Although capital allowance is available against the adjusted income of rental, the excess of capital allowance in a YA cannot be carried forward. Any unutilized capital allowance will be lost [S 63C(4)]. It should be noted that the capital allowance is not restricted to the qualifying capital expenditure provided to derive rental income. It also includes any qualifying capital expenditure used in the business of REIT. The non-availability of setting off business loss or carrying forward business losses and capital allowances in REIT is a distinct feature, different from the normal treatment business source in other sectors. 3.0 EXEMPTION OF INCOME

REIT is a special type of unit trust. Thus the exemption available to unit trust is also available to REIT.
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4.0

FRACTION OF PERMITTED EXPENSE [S 63B] AND SPECIAL DEDUCTION

FOR QUALIFYING CAPITAL EXPENDITURE [S 63A] It is expressly provided that REIT is not required to apply the formula as stated in S 63B, and the claim of deduction of qualifying expenditure against rental income as stated in S 63A. Revenue expenses would be fully deducted against the rental income and capital allowance on plant and machinery is available. 5.0 DISTRIBUTION TO UNIT HOLDERS

In order to boost the market on REIT, the Act specifically exempts REIT from tax on its total income, provided at least 90% of the total income of the REIT in that particular YA is distributed to the unit holders [s 61A (1)]. The distribution is deemed derived from Malaysia. Total Income Distribution to unit holders [ by virtue of s 61A(1)] Chargeable income XX (XX) at least 90% of total income Nil

The 90% requirement is inserted by Finance Act 2006 to take effect from YA 2007 and subsequent YAs. When the amount distributed to unit holders in a YA is less than 90% of the total income, no amount is available as deduction against total income. The REIT may be exempted from tax at REIT level. This does not mean the incomes distributed to unit holders are also exempted from tax. With effect from 1 January 2009, REIT shall pre- deduct the tax as follows and distribute only the net amount to the unit holders. (Part X, Sch 1.) Type of unit holder a) Foreign institutional investor- pension fund, collective Investment scheme or person approved by the Minister b) Non- resident company 25%
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2009- 2016 10%

c) Others

10%

REIT need not withhold any tax when distributed to resident company as s 109D (2) expressly excludes withholding tax on unit holder which is a resident company. Unit holders who receive the net amount distributed need not account for any income tax liability, and there will not be any tax credit on dividend received as seen in other unit trusts. The tax withhold by REIT represents final tax. The IRB confirmed in the post budget dialogue with professional bodies on 5.10.2006 that the withholding tax is final and the income received from REIT need not be declared in the tax return. This will ease up the tax administration in self assessment regime. 6.0 RESPONSIBILITY OF REIT (SECTION 109D)

Where a REIT distributes income to a unit holder other than a unit holder which is a resident company, tax need to be deducted. The net distribution is paid to such unit holder and the tax deducted shall be paid to the IRB within one month (or extended period allowed by the tax authorities) after distributing such income. An account must also be rendered to the tax authorities. The non-compliance to this requirement will result in: (i) (ii) A penalty of 10% of the unpaid tax, and Both the tax deducted and the penalty is debts due to government.

This applies on or after 02.09.2006. Prior to this, the penalty is imposed on gross distribution. With effect from 0.01.2009, the tax authorities may remit the whole or part of the penalty if good causes are shown by REITS. Example The trustees of a company inform you that an amount of RM26,000 of dividends is relating to non-resident company unit holders. Advice the company on its responsibility under the Act. Answer
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Section 109D requires REIT to deduct 25% tax from the gross distribution (RM26,000 x 25%=RM6,500) and distributes the net amount (RM19,500) to the non-resident company. The tax deducted has to be paid to the IRB within one month after distributing the net dividend. An account of the details of the recipients has to be accompanied with the remittance to the tax authorities. Failure to deduct the tax and remitted to the tax authorities within one month, an automatic 10% penalty on the unpaid tax will be imposed and both the tax deducted and penalty are debts due to the government. RM Gross distribution Tax deducted Penalty 25% x RM26,000 10% x RM 6,500 26,000 6,500 650 7,150

Debt due to government 7.0

EXEMPTION ON RPGT (PRIOR TO 01.01.2010)

The disposal of real property in Malaysia will attract real property gains tax (RPGT) ranges from 5% to 30%, depending on the period of ownership of real property. However, if such disposal of real property to REIT is approved by the Securities Commission, then RPGT will be exempted. This takes effect from 13.09.2003. (Real Property Gains Tax (Exemption)(No.4) Order 2003, PU(A) 451/2003) With effect from 01.04.2007 to 31.12.2009, the disposal of landed properties or Real Property Companys shares is exempted from RPGT. (RPGT (Exemption)(No.2) Order 2007). RPGT With effect from 01.01.2012, the disposal of real property with holding period of less than 2 years will be subjected to RPGT at 10%. The disposal between 3 to 5 years holding is taxed at 5% and no RPGT for disposal exceeding 5 years.
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8.0

SETTING UP REIT

Pursuant to the Income Tax (Deduction for Establishment Expenditure of REIT) Rules 2006, effective from year of assessment 2006, a tax deduction is allowed on establishment expenditure incurred by the REIT in the basis period for a year of assessment. Establishment expenditure means legal, valuation, and consultancy fees for the purpose of establishing the REIT prior to approval by the Securities Commission. 9.0 NO BALANCING CHARGE TO DISPOSER

Effective from YA 2008, disposal of buildings from companies to REITs are not subject to balancing charge and REITs are eligible to claim the balance of unclaimed industrial building allowance of the disposers. 10.0 EXEMPTION ON STAMP DUTY

Stamp Duty (Exemption) (No. 4) Order 2004: All instruments of transfer of real property to a REIT are exempted from stamp duty with effect from 13.9.2003. 11.0 CONCLUSION

REIT shares are bought and sold on a stock exchange. By contrast, buying and selling property directly involves higher expenses and requires a great deal of effort. As investors, we just need to invest a small amount to own part of the shopping mall, offices, lands, etc. through REITs. We can sell it anytime and easily through stock markets. The transaction cost to buy and sell REITs is low compared to normal properties. We can own a diversified portfolio of properties. These are the benefits that the usual property investments cannot provide.

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