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Tuesday, 1 May 2012

No Dividends = Better?

这篇文章很清楚地解释了single tier tax,值得一读。


No Dividends = Better?
April 10, 2012
In this article, we explain how a dividend is taxed, and whether dividends are good or bad to investors.
Author : Khor Jay Ee


Key Points:

Malaysia is currently having two dividend tax systems in place
There is no extra layer of tax being deducted when dividends are paid out
The difference in tax impact between dividends and no dividends depends (details below)
Tax impact should not be a main concern when looking at whether a unit trust pays dividends or not

"I Prefer Not To Receive Dividends Because I Pay More Tax..."

Some investors think that every time a dividend is paid out, tax is deducted on the dividend and hence would prefer no dividends paid out instead. The fact is: whether a unit trust (or a public-listed company for that matter) pays dividends or not, an investor would have already been taxed on his share of the unit trust’s (or company’s) profits. Yes you, as an investor, are already taxed before dividends even come into the picture. In this article, we explain how a dividend is taxed.

Let’s Go Back A Bit

A unit trust (or company) makes a profit, then pays tax to the Inland Revenue Board (IRB) amounting to 25% of its taxable profit and is left with after-tax profits. From this after-tax profits, the management decides whether or not to distribute dividends to investors, and how much of dividends to distribute. In our example, let's assume all of the after-tax profits are distributed as dividends to investors.

When a unit trust (or company) distributes dividends, unit holders (or shareholders) actually receive two things:

The net dividend, which is distributed by the company from after-tax profits; and
The tax credit (if any), which is passed on by IRB from the 25% income tax paid by the company on its taxable profits (see Illustration 1).
So going back to the assumption that tax is deducted on the dividend every time a dividend is paid out, this is simply not the case. There is no extra layer of tax being deducted when dividends are paid out. The tax is already reflected in the unit trust’s Net Asset Value (NAV) or in the case of a company, the share price regardless of whether dividends are paid out or not.

Illustration 1: Tax System (Assuming 100% of Profits Are Declared As Dividends)

So Are Dividend Payouts Good or Not?

From A Tax Perspective

Under the older imputation system which will be phased out by 1 January 2014 (Illustration 1, left column), it depends:

If you are in the 26% scale rate, you are liable for an extra 1% of tax on your dividends when you furnish your annual tax return. In this case, dividends are not good for you.
If you are in the 25% scale rate, it makes no difference on your tax payable.
If your scale rate is lower than 25%, the difference between the 25% tax credit and your scale rate will result in a tax refund from the IRB. In this case, dividends payouts are good for you.
However, under the new single tier system (STS) which is also in effect during the current transition phase (Illustration 1, right column), dividends are exempt from tax in the hands of unit holders (or shareholders). Also, the 25% income tax paid by the company will not be passed on as tax credits to shareholders. Hence in this case, dividends have no impact on a shareholder's tax payable.

From A Non-Tax Perspective

From a non-tax perspective, dividends are a good idea because an investor would have more cash in his or her hand, and also, investors generally do not want cash to be retained by the unit trust (or company) for fear that management may just let the spare cash idle instead of investing it and enjoying a yield . Also, it depends on the objective of the unit trust which is clearly stated in its prospectus; whether it aims to distribute dividends regularly or do away with any dividends at all. So really, it depends on what investors want, and how good the fund manager is at managing your money.


The tax impact should not be a main concern when looking at whether a unit trust pays dividends or not. More importantly and more relevantly, investors should determine whether or not they need the better cash flow that regular dividend payouts provide. On our platform, any dividend received is by default reinvested back into the unit trust and hence, investors would receive extra units of the unit trust. If an investor wishes to receive cash instead, he or she may sell off the extra units. We usually encourage investors to stay invested. ... .tpl?articleNo=2234

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