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Why ‘99-to-1’ property deals to avoid ABSD have zero chance of success

If someone advises you to buy a second property by using a loophole to avoid paying the stamp duty, do yourself a favour and just walk away.

As tempting as it is to dodge a levy, exploiting a loophole can be deemed as tax avoidance, which comes with stiff penalties.

Anyone caught using a sham scheme to avoid paying additional buyer’s stamp duty (ABSD) for second and subsequent properties will have to pay the applicable duty plus an extra 50 per cent surcharge as the minimum penalty. They can also be charged in court if found to have provided false information to the tax authorities.
Buyers who have existing properties must pay the full ABSD sum now when they buy properties with first-time owners.

This is where the “99-to-1” loophole comes in, as it is usually used by an existing home owner who wants to buy another property without having to pay ABSD. So this owner will ask a relative who does not own a residential property, such as a spouse, child, parent or sibling, to front the purchase of the new home.

For instance, a father first asks his son to exercise the sales option as the sole buyer for the new home. As the son is a first-time buyer, no ABSD would be payable then. But because the son cannot finance the mortgage by himself, the father needs to come on board as a co-owner.

This is done by the son “selling” a 1 per cent share of the unit to the father shortly after.

So even if the father has existing properties, he pays ABSD only on the 1 per cent share.

But the purpose of such agreements is so glaringly obvious that it is hard for the taxman not to smell a rat, especially when the second sale deal is usually signed just days after the initial purchase agreement.

Not surprisingly, the Inland Revenue Authority of Singapore (Iras) has launched an audit to compel property buyers who have made use of such 99-to-1 transfers to come clean.

Audit likely to catch all

Associate Professor Stephen Phua of the National University of Singapore’s law faculty says all transactions after the ABSD was introduced in 2011 can be looked at because there is no time bar to such audits.
“If you have made use of such arrangements to avoid paying ABSD, the question is not whether you will be audited but rather, when you will be audited,” says the professor, who has served on tax appeal tribunals for more than three decades.

As property records are pretty much kept in digital formats now, all Iras needs to do is to churn out a list of cases involving payments of ABSD for 1 per cent shares of properties, he adds.

“Of course, this does not mean that those who made transfers in higher percentages cannot be hauled up for audit. It would be interesting to see if Iras will also pursue cases where a more substantial share, say 50 per cent, and not 1 per cent, was transferred soon after,” Prof Phua notes.

A popular misconception that people have about tax law is that they think it is all right to do something just because someone has done it in the past but has not been taken to task for it.

The only way to escape the anti-avoidance rule is to convince Iras that one of the purposes of the arrangement was not tax avoidance and that there were rational reasons for doing so, the professor adds.

Buyers should not be surprised that they can be audited a few years after completing the transactions because this is stated in the ABSD declaration they have to sign.

Buyers and their lawyers are told that they must keep this document “for at least five years from the date of purchase of the property as Iras may request it for audit purposes”. 

Why buyers do it

Those who just want to purchase their first homes to live in have nothing to worry about even though they may choose to hold the assets in unequal shares.

This is because the ABSD is a measure that is aimed at cooling the appetite of investors so that they will do their sums carefully and think twice about over-leveraging on more properties just to make profits.
The ABSD payable for luxury homes can erase the bulk of the potential profits that can be made – the ABSD for a $5 million home is $850,000 (17 per cent) if the Singaporean buyer already owns a property, and $1.25 million (25 per cent) if he has two or more properties.

Not surprisingly, some buyers will think of avoiding such taxes by getting relatives who do not own properties, such as their children or retired parents, to buy extra homes for them.

But without substantial and regular incomes, these first-time buyers won’t be able to get bank loans and so need the support of co-owners to help with the purchase.

Prof Phua advises investors not to be penny wise and pound foolish because those who come up with fresh schemes to specifically avoid ABSD can be slapped with a surcharge of 50 per cent, on top of the duties that they have to pay. 

In some instances, the consequence may be very severe, because Iras can levy a penalty of up to 400 per cent if the facts allow the authority to treat them as cases of “under-stamping”, or failure to pay the appropriate duty during the transactions.

This means that you may have to pay five times the ABSD avoided. Even at the 17 per cent rate, your total penalty will be almost equivalent to the value of the property.

Can you get out?

If you are a first-time buyer who has just exercised the option to purchase and is about to get a co-owner on board, you should think twice about proceeding with such a sham arrangement in the face of an ongoing audit.

If you are able to buy the property alone, you should not get another buyer involved. Otherwise, you should consider pleading with the seller to allow you to back out of the deal on account of being misled or due to your ignorance of the tax law.

In such cases, you stand to lose up to 5 per cent of the purchase price, but this is still better than to proceed with a sham deal which will land you in more pain.

But what about buyers who already completed the 99-to-1 transfer but the taxman has yet to knock on their door?

To unravel the transactions, some people may choose to unload the properties or execute transfers of the remaining 99 per cent shares to the second owners who would then have to pay the entire ABSD that is due.

Before you jump into such drastic actions, you should know that there is no guarantee that Iras will not apply the law strictly, and overlook past infringements.

Prof Phua says selling your properties at this stage will most certainly not absolve the parties of their liabilities.

“If you don’t like the uncertainty hanging over you, you could voluntarily approach Iras to discuss the matter,” he adds.

“In most cases involving related buyers, the best possible outcome for such infringement is paying the deficient ABSD with a 50 per cent surcharge, unless you have sound commercial basis or convincing reasons for executing the belated step down in such a short period of time.”

Only first-time buyers can own homes in 99-to-1 shares from the start

Couples buying their first private property can own it in unequal shares of 99 to 1 from the start if they plan to pick up another one in the future.
The additional buyer’s stamp duty (ABSD) does not apply to first-time buyers and so they can choose to hold their property in any manner.

Mr Alfred Chia, chief executive of financial advisory firm SingCapital, notes that some married Singapore couples who are first-time buyers choose to buy in this manner to prepare for a possible “de-coupling” later. 

The term refers to a popular move by couples wanting to avoid paying ABSD for a second purchase, by allowing one spouse to take total ownership of the existing property so that the other spouse is free to buy another as a first-time buyer.
In such cases, the spouse who owns the 99 per cent stake will “buy” the remaining 1 per cent share. The usual stamp duty for a property transaction is payable but it will be nominal due to the small value of the share.

Such transactions are above board because owners are entitled to give up their previous properties.
While you may be able to pick up another property without paying the ABSD, there are other financial pitfalls you should be aware of before you embark on such a scheme.

You need to be cash rich 

The person holding the 1 per cent share must have high income because this owner has to apply for a bank loan on his own. If you have used money from your Central Provident Fund (CPF) to buy your first property, you must refund this sum plus accrued interest if you give up your share.

While you can use this sum again for the next property, you still need to have enough cash to make the refund first.

If there is a mortgage on the first property, the sole owner must be able to meet the loan requirements alone after buying the 1 per cent.

Otherwise, the couple may have to pay off the first loan, and that can affect their ability to finance the second property purchase.

Unless you have enough savings to enable you to invest in another unit, Mr Chia advises couples to do their sums carefully to see if their combined income comfortably allows them to own two properties. Alternatively, they can view their arrangement as a long-term plan to buy another property only when the first mortgage is almost paid up or when their incomes grow.

Legal ownership

Those who choose to hold properties in such unequal manner should get their wills done at the same time so that their shares get passed on to their chosen beneficiaries should anything happen to them. Without wills, the shares will pass on to their respective families and not to each other if the couple are not married.

Even if they are married and the spouse who holds the 99 per cent share dies, half of this will go to the spouse’s parents if they do not have children.

There are also implications if the spouse holding the lion’s share gets into financial trouble and is sued for bankruptcy. In such cases, the creditors may push for the sale of the property so that they can stake a claim on the 99 per cent share.

In normal joint ownership of properties, innocent spouses are entitled to keep 50 per cent of the sales proceeds if they are not implicated in the bankruptcy action.

Rising mortgage rates

Contrary to some people’s expectation that mortgage rates will fall soon, all signs are pointing to the possibility that the current high levels are likely to be the new normal a while.
As it is, fixed mortgage rates of some banks here went above 4 per cent recently before easing slightly. So borrowers are likely to use more money to service their loans, and this will impact their retirement savings.

Since 2022, the Monetary Authority of Singapore has been advising home buyers to exercise prudence and not to over-leverage by buying properties that they cannot afford. So do your sums carefully before you pick up a property in the wake of higher interest and rising inflation.

Ultimately, investing in another property requires a much higher outlay and you should plan your cash flow well so that it does not eat into your retirement plans.

Signing off!

Jae
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