4.7 Distributable Income, Distributions and NAV, "Buying" a Distribution and Taxation

Who Decides the Distribution

The Scheme Provider decides, with the Trustee's approval, how much of a scheme's income to distribute. There is no obligation to declare one, though the fund's objective, investor expectations, competitors' rates and bank deposit rates all influence the decision.

The amount available can include:

• dividend income, interest income and other income received;
• realised capital gains from selling investments;
• after deducting expenses and tax; and
• for variable-price funds, capital, under conditions such as transparency about the effect on NAV.

The current UTF Guidelines allow distributions only from realised gains or realised income, with a variable-price fund permitted to distribute out of capital if the deed allows it and it is properly disclosed. A prospectus for such a fund must warn that capital will be eroded and that this may continue until capital is depleted.

Factors the SC expects to be considered

Distributions should reflect the fund's objective: income funds should generally distribute more than growth funds. The provider should consider:

1. total returns (income and capital growth) for the period;
2. the scheme's income for the period;
3. whether there is enough cash flow to pay; and
4. the stability and sustainability of the distribution.

The Trustee must state in the annual report that the distribution reflects the fund's objectives.

Guarding against misleading "income"

• Providers must not sell investments just to realise capital gains for a distribution.
• The source of distributions must be disclosed in the financial statements.

Consultants should explain that growth funds normally pay low distributions. An investor who lives off distributions that are really capital gains or capital may not realise their capital is being eroded.

PRS points

• Two PRS funds can have the same average total return but different dividends; a member wanting some liquidity might prefer the higher payer.
• PRS distributions must be paid in units, not cash, and can only be withdrawn under PRS withdrawal rules (generally at retirement), much like EPF dividends.

Distributions Reduce NAV

A distribution hands part of the NAV back to investors, so the NAV per unit falls by the amount distributed. If units are given instead of cash, NAV per unit still falls because more units share the same pool.

Study guide example (distribution paid in units):

Distribution value = 800 × RM0.40 = RM320; units received = RM320 ÷ RM1.60 = 200; new holding = 1,000 units. The member is no better or worse off. If the provider does not distribute, the unit price simply rises with NAV, since NAV should always include all accrued income.

"Buying" a Distribution

Where the unit price is fixed at RM1.00, providers often use the unit-day method (time apportionment), so each investor's entitlement reflects how long they held units.

Where entitlement is based on units held on the ex-distribution date, an investor who buys just before that date receives the full distribution for the period. But the unit price falls by the distribution amount the next day, so the investor has merely turned capital into income, and may even be worse off if tax is due. A Consultant who uses an upcoming distribution to rush investors into buying is not acting in their best interests.

Taxation of Distributions

The study guide describes this process:

1. The unit holder includes the taxable portion of the distribution (paid or reinvested) in the annual tax return, with other income.
2. A tax credit for tax already paid by the fund is set off against the total tax payable, and any excess can be refunded by the Inland Revenue Board.
3. The Malaysian tax voucher issued by the Trustee supports the claim. (The study guide refers to the individual's return as Form B; individuals without business income file Form BE.)

Reading a tax voucher

The study guide's sample: 40.00 − 11.20 − 0.00 − 25.00 + 302.50 + 22.54 = RM328.84 net.

PRS: the study guide states that distributions of a PRS fund paid as units and reinvested in the PRS are not liable to tax.