[Update on 9 May 2024: IRAS to claw back S$60 million from private property buyers who used ’99-to-1′ scheme to reduce ABSD]
The Singapore tax authorities known as Inland Revenue Authority Singapore (IRAS) launched an audit of private property purchases in April 2023.
Their focus: 99-to-1 property ownership in Singapore that has been used as a loophole, to avoid Additional Buyer’s Stamp Duty (ABSD).
If you’re looking to invest in Private properties in Singapore and have been pitched a similar arrangement, here’s everything you must know before you sign on the dotted line!
What is 99 to 1 property scheme?
The 99-to-1 property scheme is a form of private property purchase arrangement where the owner of a property sells 1% of their stake to a co-owner. The co-owner would only need to pay ABSD on the 1%, but would be able to co-apply for a bank loan based on their financial capacity.
This “tenancy in common” arrangement is a loophole commonly used by property owners to avoid paying ABSD on their purchases on additional private properties.
Here’s how it is commonly used:
How is the 99-1 arrangement commonly used?
We will illustrate with an example of a Father purchasing a property for a spouse/child but it can apply to any 2 persons.
The assumption in this example are as follows:
- The Father has the ability to secure a bank loan as the spouse/child does not have any income.
- The Father is an existing property owner and will buy a second property solely under the spouse’s/child’s name.
- The spouse/child does not own any property currently.
- After this purchase, the spouse/child will own 100% of this new property.
Within a very short time frame after the spouse/child purchases the property, the spouse/child will then sell 1% of this newly acquired property to the Father. As the Father has an existing property and has now purchased 1% of a second property, he will incur ABSD on his 1% acquisition.
As the Father is now a co-owner of this second property, he is able to become a co-applicant for bank loans of the property.
Even though the Father’s stake is only 1%, the bank will provide a loan based on the financing capability of the Father rather than limit the financing to merely the 1% ownership stake.
This 1% sale is typically done within a few weeks of the spouse/child signing the Sales & Purchase agreement as the property is required to secure a bank loan within this time frame.
In summary, this is a two stage deal to evade taxes as the first stage involves the spouse/child purchasing 100% of the property and the second stage involves the 1% stake sale.
If the Father and the spouse/child buy the unit together from the start, ABSD is payable on the full transaction amount as long as one of them is an existing property owner.
The two stage deal allows them to pay ABSD for only the second stage which is a 1% stake sale.
To be clear, the first stage of this structure does not incur any ABSD.
IRAS steps in…
While property share splitting is legal in Singapore, IRAS believes that this is a commonly used tax avoidance scheme and has set out to audit private property purchases.
Although commonly referred to as the 99-to-1 scheme, tenancy in common allows co-owners to split their shares in any ratios. The IRAS will likely audit all other ratios of property ownership too, if there are reasons to believe that the arrangement was contrived or artificial.
Are all 99-to-1 arrangements considered as “tax avoidance” schemes?
Another common scenario is a process termed as “decoupling” – it is frequently used by newlywed couples who do not own property but would like to purchase their first private property now and subsequently purchase another private property, after they have had a few years to build up their savings.
The couple would typically utilise a 99-1 tenancy in common ownership setup. Typically, the lower income earner would hold the 99% ownership stake while the higher income earner would hold a 1% ownership stake.
As we have explained earlier, the 1% owner is able to become a co-applicant for bank loans of the property to the fullest extent of his/her financing capability and is not limited to merely financing the 1% stake.
After a few years, the 1% owner will sell his stake to the 99% owner and purchase a second property under his/her own name.
Typically, people believe that the two transactions are not connected and should not be viewed as a contrived or artificial tax avoidance scheme.
Gray areas: IRAS’ call
That said, the above may also be considered a tax avoidance scheme if IRAS can demonstrate that the sole intention of the 1% shareholding structure was intended from the onset to avoid future ABSD.
For example, if the 99% owner is unable to secure adequate financing for the original property without the 1% owner being involved.
Although some transactions do not seem like an artificial tax avoidance scheme, it depends on the facts and circumstances surrounding each transaction.
Potential homeowners are best off consulting legal or tax professionals if they are unsure.
So, what’s the legal arrangement to buy private property?
Besides the decoupling method which seems to be legal on the surface, there are a few other clear legal ways. The two most common methods are:
1) Sell one, buy two.
This is a common strategy whereby a couple sells their public housing property and use the proceeds to separately acquire one private property each. Each property will be solely held by one person.
As both persons have no property at the time of purchase, neither will incur ABSD. Both will have to secure financing for their mortgages individually.
2) Purchase under a Trust
This involves buying a property under a trust for a minor (i.e., someone who is below the legal age).
However, since May 2022, there is a 35% ABSD charge on any transfer of residential property into a living trust.
Also, as the beneficiary of the trust is the minor, it is unlikely the bank will provide any form of financing.
Closing statements
IRAS announced on May 8 that they will claw back S$60 million from private property buyers who used the ’99-to-1′ scheme to reduce ABSD, after reviewing 187 cases, of which 166 were found to involve tax avoidance.
About 10 of these cases are currently under review by the Council for Estate Agencies. IRAS will also refer individuals who promote or facilitate such tax avoidance arrangements to the relevant regulatory agencies.
Buyers are best off steering clear of any schemes that may be challenged by the authorities and should consult professionals to understand the consequences before entering into any transactions.