Are Unit Trust Distributions Taxed in Papua New Guinea?

Tax is the one part of unit trust law that the Capital Market Act 2015 does not touch. It lives in the Income Tax Act 1959 and the rates Acts that amend it, which are frequently changed and are not all published online. What follows is an outline of the framework, not a statement of anyone’s liability.

The trustee is assessed on the trust’s net income

Ordinary trusts in Papua New Guinea are generally taxed by looking through to the beneficiaries who are presently entitled to the income. Unit trusts are treated differently. Sections 136A to 136C of the Income Tax Act 1959 set up a special code under which the trustee of a unit trust is assessed and liable to pay tax on the net income of the unit trust, in much the same way as a company is taxed on its profits. The unit trust is, for this purpose, treated as the taxpayer, and the trustee is the person who files the return and pays.

The 30 percent figure matches the general company tax rate at the time and reflects the policy that a pooled investment vehicle should be taxed as an entity. Whether that rate has since been varied for particular classes of fund is a question for the current consolidated rates Act, which should be checked with the Internal Revenue Commission.

Distributions and dividend withholding tax

When a resident company pays a dividend, it must generally deduct dividend withholding tax. Section 2 of the Income Tax, Dividend (Withholding) Tax and Interest (Withholding) Tax Rates (Amendment) Act 2017 sets that rate at 15 percent on dividends “other than unit trust dividends” paid by a resident company. The exclusion exists because the income has already borne tax at the trustee level; charging withholding tax on the distribution as well would tax the same kina twice. Two consequences follow for unit holders:

• Dividends the fund receives from PNG companies it invests in are ordinary company dividends and are subject to the normal rules, which may include withholding at source and credits against the trustee’s assessment.
• Distributions the fund pays out to unit holders are “unit trust dividends” and are outside the 15 percent withholding charge.

Whether a unit trust distribution is then included in the unit holder’s assessable income, exempt as already taxed, or carries a credit for tax paid by the trustee depends on provisions of the Income Tax Act that have been amended several times. Do not treat investor-level rates as settled on the basis of this article.

The People’s Unit Trust amendment

The Income Tax (People’s Unit Trust Amendment) Act 2002 added provisions dealing with the People’s Unit Trust, the vehicle through which the Privatization Commission intended to offer citizens a stake in privatised State enterprises. The amendment shows that Parliament has been willing to write bespoke tax treatment for particular schemes, so the general code in sections 136A to 136C is not the whole story for every fund.

Capital gains, stamp duty and other points

Papua New Guinea has no general capital gains tax. A gain on selling or redeeming units is therefore usually not taxable in the hands of a private investor who is not in the business of trading securities, but an investor who deals in units as a business, or a company holding units as trading stock, may be assessed on the profit as ordinary income. Within the fund, gains on the sale of investments may or may not form part of the trust’s net income depending on their character.

Stamp duty legislation in Papua New Guinea borrows its definitions of “unit trust” and related terms from the Income Tax Act, so the same statutory concept is used to decide whether duty applies to transfers of units and to the deed itself. Whether a transfer of units attracts duty, and at what rate, should be checked with the Internal Revenue Commission, which administers both taxes.

Exempt bodies such as superannuation funds and churches, and non-resident unit holders, are on a different footing again.

Questions to ask the trustee and your adviser

• Does the trustee pay tax on the fund’s net income at 30 percent, and is that reflected in the unit price?
• Does the annual distribution statement show the components of the distribution and any tax credit attached?
• Must the distribution be declared in a personal return, and does a credit for trustee-level tax apply?
• If units are sold or redeemed at a profit, is the gain taxable on the particular investor’s facts?
• For an exempt body, how should the distribution be treated in its accounts?