Singapore's IRAS Launches Audit of 99-to-1 Property Scheme to Avoid ABSD
The Singapore tax authorities, the Inland Revenue Authority Singapore (IRAS), have launched an audit of private property purchases. Their focus is on the 99-to-1 property ownership scheme in Singapore that has been used as a loophole to avoid Additional Buyer's Stamp Duty (ABSD). This private property purchase arrangement involves the owner of a property selling 1% of their stake to a co-owner who 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 commonly used by property owners to avoid paying ABSD on additional private properties. For instance, a father purchasing a property for his spouse/child might use this arrangement. The father, as an existing property owner, buys a second property solely under the spouse's/child's name. After this purchase, the spouse/child will own 100% of this new property. Within a very short time frame, the spouse/child will sell 1% of the 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. Even though the father's stake is only 1%, the bank will provide a loan based on his financing capability, rather than limit the financing to merely the 1% ownership stake.
While property share splitting is legal in Singapore, the IRAS believes that the 99-to-1 scheme 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, and the IRAS will likely audit all other ratios of property ownership if there are reasons to believe that the arrangement was contrived or artificial.
Another common scenario is a process termed as "decoupling," which is frequently used by newlywed couples who 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 utilize a 99-1 tenancy in common ownership setup, with the lower income earner holding the 99% ownership stake while the higher income earner would hold a 1% ownership stake. After a few years, the 1% owner will sell their stake to the 99% owner and purchase a second property under their 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.
However, the above scenario may also be considered a tax avoidance scheme if 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. It depends on the facts and circumstances surrounding each transaction, and potential homeowners are best off consulting legal or tax professionals if they are unsure.
Besides the decoupling method, there are a few other clear legal ways to buy private property. The two most common methods are selling one and buying two, whereby a couple sells their public housing property and uses the proceeds to separately acquire one private property each. Both will have to secure financing for their mortgages individually, and neither will incur ABSD as they have no property at the time of purchase. The second method involves buying a property under a trust for a minor. Since May 2022, there is a 35% ABSD charge on any transfer of residential property into a living trust. As the beneficiary of the trust is the minor, it is unlikely the bank will provide any form of financing.
Ultimately, the key takeaway is that potential buyers of private properties in Singapore need to be cautious when considering certain ownership structures, such as the 99-to-1 property scheme, which may be viewed as a tax avoidance scheme by the IRAS. While there are legal methods to buy private properties, such as the sell one, buy two strategy or purchasing under a trust, it is important to consult with legal or tax professionals to fully understand the consequences of any transaction.
With the ongoing audit by the IRAS, it remains to be seen whether any changes will be made to the existing laws and regulations surrounding private property purchases in Singapore. In the meantime, it is recommended that buyers exercise caution and due diligence to ensure they are not inadvertently involved in any schemes that could result in legal or financial consequences down the road.
