Tax deferral example
Returns from REITs and Infrastructure funds can come from
distributions (dividends) paid to investors and changes in the value of
the properties held in the trust.
The tax deferred component is generally between 15% and 100% of the total dividend.
The tax deferred portion of the dividend reduces the investors cost basis, meaning investors do not pay tax on this portion of the dividend until they sell the trust and then at the concessional capital gains tax rate.
As an example, an investor makes a $10,000 investment in a REIT with an 8% dividend yield of which 40% is tax deferred.
Each year the investor holds the REIT:
- $800 is received in dividends ($10,000 at 8%)
- Tax is payable on $480 (60% of the dividend)
- Original cost basis is reduced by $320 (40% of the dividend)
After 5 years the investor decides to sell the REIT at the market price of $11,500.
- The original cost basis of $10,000 has been reduced by $320 each year for five years resulting in a new cost base of $8,400.
- The sale price of $11,500 less the new cost base of $8,400 results in a capital gain of $3,100.
- Under the concessional capital gains tax regime 50% of capital gains are taxable, therefore the investor will pay tax on $1,550 (50% of $3,100).
For simplicity, this example assumes no changes in dividends or the
tax deferred portion of the dividends, in reality there are likely to
If over the holding period of the REIT the tax deferred dividends reduce the cost base to zero, then tax becomes assessable on the full amount of future dividends.
Stapled REIT securities can also generate franking credits since stapled securities are a combination trust with a related company and investors are entitled to franking credits generated through the company.