The Motley Fool

Why don’t Australian REIT dividends have franking credits?

Australian real estate investment trusts (A-REITs) have been carried by the decade-long property boom in Australia to deliver an investor’s holy grail of capital growth and income.

The Shopping Centres Australasia Property Group Ltd (ASX: SCP) share price has risen 33% since October 2015 on strong retail tenancy rates and maintained its strong capitalisation rates. It’s a similar story for residential real estate REIT Mirvac Group Ltd (ASX: MGR), with its share price soaring 47% over the same period on sustained property demand amid cheap mortgage rates and economic growth.

On the income side of the equation, Stockland Corporation Ltd (ASX: SGP) currently yields a healthy 7.32% while Vicinity Centres Re Ltd (ASX: VCX) offers a similar 6.28% income yield for willing investors.

But if you take a closer look, you’ll see that none of these A-REIT dividends are franked – and it’s unlikely they ever will be.

The “trust” in “real estate investment trust” is the key here. Unlike Australian companies, which pay dividends out of their after-tax profits and can attach a tax-deductible portion called “franking credits”, the trust structure of REITs means its a whole ‘nother ball game.

REITs don’t technically pay dividends, these are “distributions” which aren’t franked because the income that the REIT is actually passing onto investors isn’t taxed at the REIT level. So the way it really works is a pass-through rate from the REIT, which must pay out 90% of its earnings to shareholders in the form of distributions, therefore, it does not pay corporate tax.

So what does this mean for me?

The implications of this for investors will vary on an individual’s tax situation. For those that can use franking credits, this technicality may be the difference between investing in REITs and choosing a fully-franked dividend stock such as Alumina Ltd (ASX: AWC).

With a Labor election victory looking likely in May, it will be interesting to see how the market reacts to the potential changes to cash refunds from franking credits for retirees. While no one can say for sure, retirees should be aware of their after-tax return implications from the changes. Particularly for those invested in those juicy fully-franked shares.

After all, an efficient tax setup can get you closer to your after-tax target return without lifting a finger.

JUST RELEASED: Our Top 3 Dividend Bets for 2019

NEW! The Motley Fool’s team of crack analysts has just released a timely report revealing the names and codes of their top 3 dividend share recommendations for 2019. Be among the first investors to get access—FREE, for a strictly limited time. You’ll discover the names of 3 hefty dividend paying companies with what our analysts consider to be solid growth prospects for the year ahead…

The first two currently offer fat, fully franked yields and the third is a surprising REIT offering you the chance to become a landlord with none of the hassle! If you’re looking for hot new ideas, look no further. But you do need to hurry. Snap up your free copy now, before supplies run out!

Simply click here to grab your FREE copy of this up-to-the-minute research report on our top 3 dividend share recommendations right away.

Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.