Decoupling to save on tax? You may lose right to property if ties go awry

Just google the word “decoupling” and you will see multiple listings from realtors and lawyers alike promoting their services to help property buyers avoid paying additional buyer’s stamp duty (ABSD) with such a creative home ownership plan.

But those who have been peddling such services for years may want to hit the pause button for now so that they can study the recent High Court case which found that such transactions are not without pitfalls. Indeed, the court found that owners who decouple can run afoul of the tax law if they are not upfront with their arrangements.

This is especially so if property buyers are lured into thinking that decoupling is a watertight loophole that allows Singapore home owners to buy a second property without paying ABSD, while still retaining ownership in both properties.

Joint owners who decouple – that is, one takes over the whole property – often have the endgame of letting the person who sold out buy a second property as a first-timer who does not have to pay the 20 per cent ABSD levied on Singaporeans.

To further save on stamp duty, some couples plan ahead and buy their first property in a 99-to-1 share, so they need to pay the normal stamp duty on just that 1 per cent share if the 99 per cent co-owner takes over that tiny share.

This scheme is not the same as that in the recent 99-to-1 saga that saw some families penalised for avoiding ABSD.

Such cases involved first-time buyers who could not afford a home, so they roped in their relatives, who already own homes, to support mortgage applications.

But instead of buying as joint owners, which would attract ABSD on the full price, the first-timers bought solely as 100 per cent owners and then “sold” just 1 per cent of the property to relatives. So the relatives paid ABSD on only that minute share.

Owners caught using the two-stage sham have been ordered to pay the full ABSD and a 50 per cent surcharge.

But decoupling has long been viewed as a legitimate move for longer-term planning because owners can hold and dispose of properties in whatever proportions they choose.

The spotlight fell on such transactions recently because a couple who fought over their property stakes highlighted to the High Court that such deals were not as simple as they had made them out to be.

Ironically, the case that sparked the court’s probe into this popular tax-saving move did not even involve decoupling, as the then dating couple broke up before any prospect of another purchase.

During the good times, they had planned to hold their first property in the ratio of 99 to 1, in favour of the girlfriend. A reason for doing so was to avoid paying ABSD if they were to purchase a second property.

When they fell out, the true picture emerged, because the boyfriend claimed he paid more and so should own a lot more than his tiny share. In the end, he was awarded a share of over 50 per cent, only because the court took note that no taxes were avoided as the couple did not decouple or buy another property.

The outcome might have been different had the boyfriend bought a second property after decoupling without paying ABSD and then staked a claim for a share in the first property.

High Court Judge Lee Seiu Kin noted that while there was nothing inherently wrong with buyers holding their stakes in the 99-to-1 proportion, the transaction could turn illegal if the decoupling was not a genuine outright transfer but merely a scheme to avoid paying tax.

For instance, if the 1 per cent owner gives up the share but has an arrangement with the other owner to still co-own that same property, this owner would be deemed to have evaded tax by wrongly declaring his true beneficial ownership.

If he then buys another property as a “first-time buyer” and so saves 20 per cent of ABSD, he could be accused of duping the taxman because he is still a “beneficial” co-owner of the first property.

If that is not risky enough, using the 1 per cent as a ploy to save on buyer’s stamp duty in an anticipated decoupling move could also attract penalties for underpayment of tax.

The Inland Revenue Authority of Singapore (Iras) noted that whether tax avoidance or tax evasion has been committed would depend on the facts and circumstances of each case.

The test often boils down to whether the property transactions are carried out in good faith as a financial planning move or a deliberate attempt to avoid paying more tax, such as using a contrived scheme that has little or no commercial substance or withholding crucial information from the taxman.

Penalties aside, the recent case provides a cautionary tale that those who commit an “illegal” act, such as using a scheme to deliberately avoid paying taxes, may find it hard to stake claim on any disputed property.

Assume co-owner Jim “transfers” his share in the property to co-owner Jane to avoid paying more tax on his next purchase. Jim is likely to face an uphill task to claim that he still owns a share in the property fully owned by Jane because the courts are unlikely to uphold a sham deal.

So before owners think about saving on taxes, they should ask whether they are prepared to give up the decoupled real estate should they end up in a dispute or divorce later.

Still prudent to go 99 to 1?

The stark manner in which one owner holds 99 per cent while the other has 1 per cent is a dead giveaway to the taxman that this could be a scheme to pay less tax.

After all, the couple in the High Court case admitted that they held their property in this way because they had planned to decouple later. But this was done solely to pay less tax because the 1 per cent owner actually viewed himself as an equal owner and had contributed substantially to the property purchase.

Based on Justice Lee’s analysis, such decoupling cases would minimally attract the penalty for underpayment of stamp duty unless the owner can convince the taxman that he genuinely held only 1 per cent of the property.

However, the 1 per cent owner who makes such a declaration and then transfers away the share is as good as forgoing the rights to the decoupled property. After all, claiming otherwise would amount to an admission of giving false information to Iras, which is a serious offence.

No wrongdoing for genuine gifts and sales

National University of Singapore tax expert Stephen Phua said he knew of owners who were holding unequal shares in their properties long before the ABSD scheme started in 2011 to curb speculation.

“Some may just hold 1 per cent because they genuinely only wanted to help pay down the mortgage,” said Associate Professor Phua, who also practises as a tax consultant with Allen & Gledhill.

So, if such owners subsequently transfer their 1 per cent share in the property before buying another one, it would be difficult to accuse them of wrongdoing since the arrangement was a genuine gift.

Similarly, existing joint owners who decouple cannot be said to be under-declaring their shares if the transfer was genuine and stamp duty was properly paid on 50 per cent of the market value.

If the spouse who no longer owns any residential property buys another property, no ABSD is payable, Prof Phua added.

This means that if you decouple, you no longer own that property. If that is not your intention, you should do your sums to see if it’s worth losing your stake in this property just because you want to save on ABSD for the next purchase.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

Using secret family deals to avoid taxes can exact a heavy price