Mr Speaker, the proposed amendments to the Business Trusts Act (2004) are predominantly of a technical nature, with the goal of streamlining existing legal stipulations, or to better align the Act with other Acts—in particular, the Companies Act (1967) and the Securities and Futures Act (2001)—or international standards, such as the International Financial Reporting Standards (IFRS).[1]
To the extent that these amendments further strengthen governance provisions in Business Trusts (BTs)[2]—many of which have already been incorporated into these other Acts—they are welcome.
For my speech, I wish to speak about three issues. I will begin by touching on a number of concerns directly related to various amendments proposed in the Bill. Next, I will move on to discuss the implications that the Bill may have—by further encouraging the BT structure—for the economy at large. Finally, I will speak much more generally about how trusts, along with foundations, may be repurposed as instruments that would enable the government to better meet its fiscal objectives.
Before I proceed, I wish to declare that I am the Chief Economist, Emeritus, of Thirdrock, a homegrown boutique wealth management and consultancy business.
The good, bad, and ugly of the Bill
The Bill offers a host of amendments; some 124 pages worth, for an original act that was just 14 pages longer. Some of these strike me as unambiguously good, others a little bad, and yet others are just a tad ugly.
First, the Bill makes provision, captured in the revised Section 20 of the Bill, that only a 50 percent majority—rather than the current supermajority of 75 percent—of unitholders’ approval is required to remove the trustee-manager.
This amendment corrects a longstanding (yet glaring) discord between BTs and other related trust structures (notably real estate investment trusts, or REITs), where only a simple majority was required for removing the manager. Given the enormous power vested into a trustee-manager within the BT structure, this change will reenfranchise the average unitholder. For this reason, the change is good, and very much welcome.
Second, I would question the porting of certain amendments, just because they have been stipulated in the Companies Act. As this House is likely aware, business trusts are distinct from either corporations, or trusts. For that reason, certain advantages offered to either pure business enterprises or trusts may not be as applicable to a BT. Let me offer two concrete examples.
The new Section 27B and C of the Act allows the trustee-manager to extend trust monies, via a loan on specified terms, to trust directors, akin to sections of the Companies Act.[3] Now, while one could credibly make an argument that directors of a firm are integral to its viability as a going concern—and hence deserving of such support from the business entity—the case is harder to make for a trust. After all, the very design of the trust is already one step removed from the principals, to allow business decisions to be rendered sufficiently independently of the directors.
As another example, the new section 52C vests on the Monetary Authority of Singapore (MAS) the ability to liquidate and deregister business trusts.[4] To be fair, this strikes me as a fairly pedestrian change that is likely to be invaluable for operational purposes. Still, I wish to seek the assurance of the Minister that the MAS will only exercise this power to wind BTs judiciously. In particular, it should already be clear, when exercising this clause, that the trust is already clearly defunct, rather than to exercise this power as a means of regulation. By the same token, I would like to ask the Ministry to clarify the channels of appeal available to a BT, in the event that it receives a request to wind up from the MAS.
In my view, these appropriations from the Companies Act—while undeniably better aligning the two—do not sufficiently respect the distinctions between the two business structures, and therefore I find them, at risk of being a little bombastic, a little ugly.
Third, there is a potential bad that I wish to highlight from promoting the BT structure, especially over and above a REIT structure.[5] Sir, a casual examination of the current list of registered BTs[6] reveals that of the 18, 8 are essentially dealing in real estate, while another three[7] also arguably have their fortunes tied to real estate assets.
Why should this matter? Well, as industry observers are well aware, a BT is not constrained in terms the amount of leverage they are able to take on. In contrast, REITs may only be geared up to 50 percent. This introduces a potential concern, where what are essentially REITs are registering as a BT, to avoid the prudential stipulations related, in part, to excess leverage. Indeed, while some BTs[8] do explicitly state that their practices more closely imitate REIT guidelines—such as restraining the amount of leverage they take on—these are merely self-regulating assurances, which are not limited by the force of law.
Are business trusts good for the economy?
Sir, I fully grasp the motivation to expand the scope and accessibility of business trusts. This vehicle offers greater flexibility in extracting value from cash flow-generating assets, over how distributions may be made, and in the structuring of assets under development.[9] Undoubtedly, these are major reasons for their comparative popularity.
I also recognize the benefits of BTs from the perspective of our position as an international financial center. Making as many possible asset management instruments available as possible strengthens our relative attractiveness as an international financial and wealth management center. It also allows our financial sector professionals—and population at large—to germinate a keener interest and understanding of the role that increasingly more complex financial instruments play in our domestic financial and economic landscape.
Even so, there are potential risks to an expanding role of BTs, insofar as our economy is concerned. I had already alluded to one, pointing out that BTs are legally unconstrained by loan-to-value requirements, and hence may engender greater financial stability concerns as a result. Allow me to touch on another, one that may carry more profound implications for the average worker in the economy.
As members in this House are undoubtedly aware, business entities—whether taking the form of companies or a trust—typically adhere to the rigors of maximizing profits and shareholder value. In a world unencumbered by nonmonetary considerations, it would be difficult to fault either entity for being more brutal in imposing market discipline.
But we know that companies, large and small, deviate from this so-called neoclassical ideal. All the time. Enterprises in China[10] and Japan[11] often strive to preserve employment, either for reasons of social stability or corporate loyalty. German businesses consider not just shareholder interests, but also stakeholder ones, with labor unions routinely engaged in workplace bargaining with management to deliver extra employment protection and social benefits.[12] Even here at home, this government has frequently trumpeted the importance of tripartite negotiations to promote aggregate welfare within our corporate context.
This begs the question of how business trusts fit into this picture of stakeholder capitalism. If BTs increasingly become a favored structure for managing large business asset holdings, would the additional distance between unitholders and management, afforded by BTs, inadvertently undermine the ability of workers to engage in negotiations with management? Would we see a greater willingness by BT-managed businesses to fire employees at the first whiff of a downturn? What are the implications of a more REITs and real estate-focused BTs for escalating rent and sales prices, if such structures were to proliferate?
After all, the BT structure—as opposed to other forms of trusts—permits greater proactive involvement of the trustee-manager in the everyday firm operations. If this enhanced interventionism is paired with a more flagrant disregard for nonpecuniary objectives—perhaps because of differences in the investment horizon—then I fear that directed action by the trustee-managers (or their proxies) on corporate decisions may induce more cut-throat behavior by these firms in favor of capital, to the detriment of labor.
Finally, I will note that BTs do not have a distribution requirement, whereas other trust frameworks—such as REITs—must respect a distribution of at least 90% of distributable income under the Income Tax Act. While this allows the trustee-manager to exercise greater discretion in how they translate cash flow into returns, one is left to wonder if the distinction ends up promoting excess accumulation and, in turn, exacerbate wealth inequality.
This is, of course, a nontrivial matter. As this House is well aware, social inequality has been rated by Singaporeans as their third-most pressing concern, just behind bread-and-butter issues like employment and healthcare.[13] This concern is especially acute among young Singaporeans[14] who, perhaps predictably, feel like they have the greatest stake in the yawning wealth gap. It has also been exacerbated by the influx of wealthy individuals from abroad.[15]
How trusts can foster a culture of philanthropy to meet fiscal needs
What I am suggesting here is that we can go one step further, and refine our existing system of institutions associated with estate planning. I had previously alluded to how we could do this in the context of my adjournment motion on wealth taxation.[16] I will now elaborate on this idea in greater detail.
While trusts may seem esoteric and limited to high-net worth households, many of us would, at some level, be familiar with some form of trust. Most of us would have nominated beneficiaries to our insurance policies or CPF monies. Last year, this House also debated amendments to the Mental Capacity Act,[17] which included an extensive discussion of the Lasting Power of Attorney, which is a trust arrangement. Those of us lucky enough to have savings set aside in a unit trust will have some familiarity with such investment trusts. And of course, most of us have contributed to charities at some point in our lives, and such philanthropic foundations are a cornerstone in trust institutions. Thus, even without more involved estate planning, the average Singaporean will have some exposure to the notion of trusts.
Of course, those with more means will often rely on more sophisticated instruments to manage their estate. Private family trusts, as well as family offices, are increasingly widespread here, allowing us to harness our global advantages as a wealth management center. Investment-oriented trusts, including unit trusts, REITs, and BTs—the focus of our debate today—enable such assets to grow in a manner unencumbered by tax considerations prior to vesting.[18]
At the national level, this has promoted a landscape where trust institutions have become ever-more important. The REIT asset class has grown to $138 billion in 2020.[19] As Minister Tharman shared in response to my Sengkang colleague Louis Chua’s parliamentary question, the number of family offices has almost doubled between 2020 and last year, from 400 to 700.[20] Our listed business trusts now boast a market capitalization of close to $20.6 billion.[21] Yet in spite of this rapid growth in investment-oriented trusts, there are only a little more than 400 philanthropic foundations and trusts in Singapore.[22] The amount of tax-deductible donations received by charities has even receded slightly, from a peak of a $1.07 billion in 2018, to $1.01 billion in 2020.[23]
I venture that we can go further in how we manage our trust institutions, to not only accentuate their supply side—the growing of assets ensconced within a trust—but to also foster their demand side, and evolve them into grantmaking institutions, and thereby build a stronger culture of philanthropy among the wealthy in our nation.
Mr Speaker, we have come far as a nation; since independence, our per capita incomes, adjusted for inflation, has increased almost sixteen-fold, from around $5,800 to about $91,000 last year. We are, undeniably, no longer a developing country. Yet our philanthropic culture still retains the vestiges of economies that are far less advanced. Our fiscal financing, while diversified, essentially relies on a regime of low income taxes, with charges and fees—which are regressive in nature—still playing a prominent role.
We could, instead, allow the private and nonprofit sector to assume greater importance in financing various public expenditures. This goes beyond the approaches currently favored by this government, such as public-private partnerships for infrastructure, or the granting of the right to issue tax-exempt receipts for institutions of public character.
In many advanced economies, wealthy individuals may fund a wide range of socially-beneficial activities—from naming rights for hospitals and university buildings (and even park benches!), to setting up nonprofit organizations dedicated to various causes, to establishing foundations that provide grants to groups aligned with the foundation’s declared mandate. One wonders if our tax structure could be further refined to provide additional incentives for business trusts to also be more involved in philanthropic activities, as well.
In other jurisdictions, such activities are often wholly unconstrained; as a result, it could give rise to perverse situations where a billionaire’s favorite pastimes—such as art galleries or classical music orchestras—are financed through tax exemptions, while causes that benefit the poor remain underfunded. Or foundations become indirect wealth accumulation vehicles. To preclude such outcomes, we should insist that these foundations consistently deplete their endowments by funding approved fiscal expenditures, until a stipulated closure date. Foundations may retain some independence over their target expenditures, but these areas would be preselected by the government. This would result in an indirect wealth tax that carries significant social capital, appealing to high-net-worth families’ sense of agency, civic responsibility, and civic responsibility.
This could also encourage the development of fundraising and grant-writing expertise in our domestic workforce. Besides potentially expanding a small cottage industry in the social sector, it could also increase the awareness of, and affinity toward, important causes that are valuable in our society.
In my conversations with those in the industry, I have been impressed by the complementarities that exist between the supply and demand sides of this story. Indeed, many donor trusts and foundations, private banking clients, and nonprofits are served by the selfsame asset and wealth management professionals. As we position ourselves to mature even more as a global wealth management hub, enhancing such intermediary functions is the logical next step.
In conclusion
My hope, Sir, is that trusts and foundations will eventually become a key part of our nation’s social fabric. That we will not just privilege certain trust structures—such as investment and business trusts—to the detriment of others that was enrich the life of our citizens and our economy.
[1] This is the case for Part X of the Bill.
[2] For example, in Sec. 52G–Q, and in Sec. 63A–G.
[3] Notably, Sec. 163 of the Companies Act.
[4] This aligns with Sec. 344 of the Companies Act, which vests the same power with the Registrar.
[5] This does not excuse, of course, any potential problems with REITs; I am merely emphasizing the differences vis-à-vis REITs.
[6] The list is available on the MAS website: https://www.mas.gov.sg/regulation/capital-markets/List-of-Registered-Business-Trusts.
[7] The Accordia Golf Trust, Hutchison Port Holdings, and Keppel Infrastructure Trust all hold significant real estate assets as part of their business model, albeit their focus moves beyond residential or commercial real estate interests.
[8] This is the case, for instance, for the Ascendas India Trust, which assures investors that it will only take on up to a 50 percent limit on its loan-to-value book. See: https://ir.a-itrust.com/faq.html.
[9] See Tong, R. & W.S. Bin (2012), “Why Singapore Business Trusts Are Proving Popular with Sponsors,” Clifford Chance Briefing Note, Singapore: Clifford Chance.
[10] Putterman, L. & X.Y. Dong (2000), “China’s State-Owned Enterprises: Their Role, Job Creation, and Efficiency in Long-Term Perspective,” Modern China 26(4): 403–47.
[11] Suzuki, H. (2010), “Employment Relations in Japan: Recent Changes under Global Competition and Recession,” Journal of Industrial Relations 52(3): 387–401.
[12] Clark, I. (2006), “Another Third Way? VW and the Trials of Stakeholder Capitalism,” Industrial Relations Journal 37(6): 593–606.
[13] Ho, T. (2020), “What Worries Singaporeans, Inequality and Playing a Part in Policy Development,” Press Release, Feb 17, Singapore: Ipsos.
[14] Blackbox Research Team, (2022), “Widening Wealth Gap a Singaporean Worry,” Every+One, May 16.
[15] Blackbox Research Team, (2022), “The Perfect Inequality Storm is Brewing in Singapore,” Every+One, Sep 14.
[16] Lim, J.J. (2021), “Taxation for a Dynamic and Fair 21st Century Economy,” Hansard 95(41): Nov 11.
[17] Hansard 95(32):
[18] Importantly, this does not mean that such trusts are eternally exempt from taxation; BTs are taxed at the trustee level, at the headline corporate tax rate (currently 17 percent), with the exception of certain income streams for qualifying foreign trusts. See IRAS (2021), IRAS e-Tax Guide on Income Tax Treatment of a Trust Registered Under the Business Trusts Act, 3rd ed, Singapore: Internal Revenue Authority of Singapore. Note that—as is the case for other capital investments—Singapore does not levy any capital gains, dividend, estate duty, or inheritance taxes.
[19] MAS (2021), 2020 Singapore Asset Management Survey: Singapore–a Progressive and Vibrant Asset Management Centre in Asia Pacific, Singapore: Monetary Authority of Singapore.
[20] Hansard (2022) 95(63): Jul 4.
[21] Data are based on SGX securities prices, excluding the wound-down Eagle Hospitality Trust, at the prevailing SGD/USD exchange rate for USD-denominate trusts. See: https://www.sgx.com/securities/securities-prices?code=businesstrusts.
[22] Tan, P. & S.S. Lam (2017), “Philanthropic Foundations in Asia: Insights from Singapore, Myanmar and China,” AFD Research Paper Series 2017-58, Paris: Agence Française de Développement.
[23] Commissioner of Charities (2021), Annual Report 2020, Singapore: Ministry of Culture, Community, and Youth.