Inland Revenue Authority of Singapore (IRAS)
The Inland Revenue Authority of Singapore (IRAS) is investigating property investors who have used a "99-to-1" sales contract loophole to evade paying the additional buyer's stamp duty (ABSD). According to The Straits Times, the authority is sending letters to some private real estate first-time buyers, requesting an explanation as to why they signed fresh agreements to sell just 1% of the same properties to their relatives shortly after exercising their purchase options. This loophole allows the relatives who already own properties to become co-owners and co-applicants for bank loans without being subject to the ABSD.
This move is expected to affect the property investment community, as such cases are reportedly common. The audit will cover all cases involving such agreements, regardless of when the transactions took place, as there is no time limit for such investigations. Property agents and financial planners have shared that they have come across such cases frequently. Home buyers at launches are often encouraged to exploit the loophole to bring in co-owners later, as they are not required to have bank loans ready when confirming their purchases with developers.
The spokesperson for IRAS declined to provide specific details about an ongoing audit but emphasized that Iras takes a firm stance against any actions taken to reduce or avoid tax obligations. This includes situations where buyers purchase properties through contrived or artificial arrangements to avoid paying ABSD.
The cases being audited share a common pattern: initial buyers who did not previously own real estate purchased properties without paying ABSD. Shortly after, these buyers entered into 99-to-1 agreements to sell just 1% of the same properties to relatives who already own other residential units.
These two-stage deals are typically done because the initial buyers do not have sufficient incomes to secure bank loans and require co-owners to be co-applicants. If they were to buy the property together from the outset, they would have to pay ABSD as long as one of the parties already owns a home. By having a second co-owner purchase the 1% share at a later stage, the initial buyers believe that they only need to pay ABSD on that small portion, thereby avoiding the duty on 99% of the property.
In the audit letter, the first buyers are requested to furnish copies of both the initial and subsequent sales agreements. They are also questioned about why they sold a partial share of the property within a short span of time and why the sale to the second buyer was only for 1% of the property.
According to the IRAS spokesperson, in cases where tax avoidance is suspected, the Commissioner of Stamp Duties has the power to ignore or modify any arrangements aimed at tax avoidance. The Commissioner can recover the correct amount of stamp duty and impose a surcharge of 50%.
Singaporeans who own a second property are required to pay 17% ABSD, while those with multiple properties pay 25%. For instance, if a property purchased through the 99-to-1 loophole cost $1 million, the total tax and penalty payable would be $252,450 if the second buyer already owns a property. If they own more than one, they would be liable to pay a total of $371,250.
For properties worth $2 million, the payments would be $504,900 or $742,500 respectively. Permanent residents and foreigners are subject to higher ABSD rates, and if they are found to be in violation, their penalties would be even more substantial.
Additionally, if the stamp duty and surcharge are not paid by the deadline, further penalties of up to four times the outstanding amount may be imposed, as noted by IRAS. This could potentially result in even more severe consequences for those found to be in violation.
According to Associate Professor Stephen Phua, a leading tax expert at the National University of Singapore Law Faculty, the audit may implicate lawyers who have assisted clients in entering into such arrangements. He added that lawyers have a responsibility to advise clients of the risks involved in such schemes.
However, unlike in New Zealand and Australia, the law in Singapore does not impose separate penalties on promoters of tax avoidance schemes. In Britain, there are rules for compulsory disclosure. Professor Phua suggested that IRAS could consider implementing similar measures to prevent aggressive or abusive schemes and safeguard revenue and public policies.