Iras probes home buyers who used ‘99-to-1’ loophole to avoid paying ABSD
SINGAPORE - The taxman has launched an audit of property investors who have used a loophole “99-to-1” sales contract to dodge paying the additional buyer’s stamp duty (ABSD).
The Straits Times has learnt that letters are being sent to some first-time buyers of private real estate to demand that they explain why they signed fresh agreements to sell just 1 per cent of the same properties to their relatives barely a week after exercising the purchase options.
Such backdoor deals allow those relatives who own other properties to become co-owners and co-applicants for bank loans without being involved in the main purchases, which would have attracted the ABSD. The audit by the Inland Revenue Authority of Singapore (Iras) will ruffle the property investment community because such cases are apparently quite common.
A veteran financial planner told ST that he came across about five cases recently. A property agent added that he was not surprised by the audit because he knew that quite a number of buyers at property launches were advised to exploit “this loophole” to bring in co-owners later, as they were not required to have bank loans ready when confirming their purchases with the developers.
Iras letters seen by ST showed that the audit was for transactions that took place in 2021, but the investigation is likely to target all cases involving such agreements, as there is no time bar for such probes. An Iras spokesman declined to provide details of the audit, but said: “Iras takes a stern view of any arrangements for the purpose of reducing or avoiding tax. This includes the scenario where buyers purchase properties under a contrived or artificial arrangement in order to reduce or avoid the ABSD they have to pay.”
Cases that are being audited have common factors: The first buyers did not own any real estate, so when they bought properties, seemingly for themselves, they did not have to pay ABSD. Shortly after, they signed 99-to-1 agreements to sell just 1 per cent of the same properties to relatives who have other residential units.
Such two-stage deals are done because the first buyers do not have sufficient incomes for bank loans, and so they need co-owners to be co-applicants. If they buy the unit together from the start, ABSD is payable so long as one of the parties is a home owner.
By getting a second co-owner to buy the 1 per cent share later, they think they need to pay ABSD only for that minute portion, thus saving 99 per cent of the duty. The audit letter asks the first buyers to provide copies of both the first and second sales agreements.
They are also asked why they sold a partial share “in such a short period of time” and why the sale to the second buyer comprised only 1 per cent of the property. The Iras spokesman said: “In cases of tax avoidance, the Commissioner of Stamp Duties will disregard or vary any tax avoidance arrangement, claw back the rightful amount of stamp duty and impose a 50 per cent surcharge.”
Singaporeans who have second properties pay 17 per cent ABSD; those with more properties pay 25 per cent.
So if the property bought under the 99-to-1 loophole cost $1 million, the total tax plus penalty would be $252,450 if the second Singapore buyer already has a property. If they own more than one, they have to cough up $371,250 in total.
Those payments would be $504,900 or $742,500 if the property was worth $2 million. Permanent residents and foreigners pay higher ABSDs, so their penalties would be even heftier if they are caught.
And there could be even more pain in store, as Iras notes: “Further penalties of up to four times the outstanding amount may be imposed if the stamp duty and surcharge are not paid by the deadline.”
Singapore’s leading tax expert, Associate Professor Stephen Phua of National University of Singapore Law Faculty, said the audit may potentially implicate lawyers who have helped clients to enter into such arrangements. “They were under a duty to highlight the risks of doing so to clients,” he said.
But the law here does not impose separate penalties on promoters of tax avoidance schemes, unlike in New Zealand and Australia, which deter professionals from helping clients escape paying taxes. There are also rules for compulsory disclosure in Britain.
“Perhaps Iras could consider putting in place such measures to combat aggressive or abusive schemes, for the protection of revenue and sound public policies from being undermined,” Prof Phua added.
