More On Business Trusts

Business trusts were introduced in Singapore as a new form of business structure in September 2004 when the Business Trusts Act (Chapter 31A of Singapore) was passed in the Singapore Parliament.

The introduction of this new asset class – essentially companies structured as trusts – was intended to add greater depth and breadth to Singapore’s equity markets. This followed the successful introduction of real estate investment trusts (“REITS”) in 2002.

While a business trust is similar to a company in that both run and operate business enterprises, a business trust, unlike a company, is not a separate legal entity. As a business trust is established under a trust deed, the trustee-manager has legal ownership of the underlying assets in the trust. The trustee-manager is also responsible for managing the assets for the beneficial owners of the trust.

In Singapore, the Business Trusts Act has been formulated with the twin objectives of protecting the interest of unitholders (i.e. the investors) in the business trust and to establish the duties and accountability of the trustee-manager of a business trust and its directors. Business trusts that raise funds through the offering of units to the retail public must be registered under the Business Trusts Act.

The investing public of business trusts reaps benefits in the form of distributions. Business trusts are allowed to pay distributions to investors out of operating cashflow. This is unlike companies, which can only pay dividends out of accounting profits.

As such, infrastructure companies are seen to be suitable candidates for the creation of business trusts. This is due mainly to the nature of their businesses, which generally require high initial capital expenditure but which offer stable operating cashflow over the long term.


Some differences between Business Trusts, REITS and SGX-Listed Companies


Business Trust REIT Listed Company
Legislation Regime
  • Business Trusts Act
  • Code on Collective Investment Scheme
  • Companies Act
Constitution
  • Not a separate legal entity
  • Created by a trust deed
  • Unitholders have beneficial interest and a lesser degree of control than shareholders of a company
  • Not a separate legal entity
  • Created by a trust deed
  • Unitholders have beneficial interest and a lesser degree of control than shareholders of a company
  • A separate legal entity
Responsible Entity
  • Trustee-Manager as the single responsible entity with its role similar to the combined roles of the REIT’s asset manager and trustee
  • Trustee and Asset Manager are separate entities
  • Board of directors and management
Board of Directors
  • Majority of directors must be independent
  • Higher standard of independence
  • One-third of the Board to consist of independent directors
  • At least two nonexecutive directors who are independent and free of any material business or financial connection with the company
Asset
  • No restriction
  • Real estate
  • No restriction
Depreciation/Revaluation
  • No impact on distribution payout
  • No impact on distribution payout
  • Affects dividend payout, which is restricted to accounting profits
Gearing Limit
  • None
  • 45%
  • None
Taxation
  • Subject to income tax
  • Tax transparent
  • Subject to income tax
Source: Adapted from SGX-ST website
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