Investors who exploit ABSD loopholes have more to lose than gain

The investigation into property investors who used the 99-to-1 loophole to avoid the additional buyer’s stamp duty (ABSD) has brought into sharp focus other seemingly legitimate ways that investors are using to dodge this levy.

The ruses usually involve roping in close relatives who do not own any real estate and getting them to buy new or resale properties because they would not need to pay ABSD as first-time owners.

Cases involving well-off investors are hardest to detect because the properties are usually bought with cash in the sole names of compliant relatives.

So what if one of these relatives decides to cash in and sell the property on the sly? Well, they have that covered: The investors get them to sign private agreements acknowledging that the cash used to buy the property was a loan.

When the so-called buyers are parents, the children would ensure that they make wills soon after to specifically bequeath the properties back to them.

Leading tax expert Stephen Phua from the National University of Singapore’s law faculty says that when all these steps are taken in concert, it can be deemed an arrangement to escape ABSD and it will be caught under tax avoidance rules.

“In some cases, contrived wills and loan documents could well be the undoing of the scheme if it can be demonstrated you never intended the owner in name to benefit from the arrangement,” adds Associate Professor Phua.

But as such deals are usually done within the family, it is hard for the taxman to catch them unless disputes erupt between the parties or one of them chooses to squeal on the secret arrangements.

When such deals are exposed, Prof Phua points out that documents created to conceal them may be declared as shams if they were intended to create a false reality.

Parties to shams could be liable for penalties of up to 400 per cent of the initial levy amount, far more severe than the 99-to-1 cases now being probed by the Inland Revenue Authority of Singapore (Iras).

“More seriously, secret trusts designed to conceal true beneficial ownership may well constitute a tax evasion offence,” adds Prof Phua.

Buyers who used 99-to-1 loopholes to avoid ABSD are easy to spot because their sales agreements are registered with the authorities.

Take a father who already has a home, who then helps his son to buy a property in the son’s sole name. As the son is a first-time buyer, no ABSD was payable.

But as the son is ineligible for a bank loan, a co-owner is needed to help finance the purchase. So the father engages a lawyer to help the son transfer a 1 per cent share to him soon after the son became the owner by signing the main agreement.

In doing so, the father has to pay ABSD only for the 1 per cent; he would have had to pay 100 per cent of ABSD if they had bought in joint names from the start.

Tax avoidance is not a crime – unlike tax evasion, which usually involves non-declaration of income – but those who make use of such contrived schemes to avoid taxes can be ordered to pay civil penalties, such as paying the duty avoided plus a 50 per cent surcharge.

This is a strong deterrence for property investors because Singaporeans who used the 99-to-1 scheme before the new ABSD hike took effect from April 27 can be ordered to pay more than $500,000 if the value of the property was $2 million. The amount will be higher if co-owners have more than one property or are not citizens.

Law will not side tax dodgers

Prof Phua, who has served in tax review tribunals for the past three decades, says that Iras is known to audit first-time buyers who suddenly become property owners despite having no recent reported earnings.

“When a retiree or a young man who has just started working suddenly becomes the sole owner of a fully paid up multimillion-dollar property, it will naturally invite questions on the source of the funding,” he adds.

For instance, the wife of a well-off man was recently queried because she bought a luxury property with cash even though she had no taxable income.

She told Iras that her husband gave her a large sum of money and she used it to invest in the property as a first-time buyer.

Prof Phua says that no law is broken if the taxman is satisfied that it is a true gift, which is not taxable, and the recipient is fully entitled to spend the funds on property.

But before you think that giving cash to someone is a legitimate way to buy property on your behalf without paying ABSD, be aware that you could lose the whole property if the “owner” sells it and keeps the money.

The High Court has ruled that “equity” – the law that enables courts to do justice for genuine owners of assets – will not help people whose plight arose because of their intention to circumvent laws.

Any claims from such people will fail because they are deemed to “have not come to equity with clean hands”.

While matrimonial assets can be shared when a marriage breaks down, the same rule does not apply to other relatives and friends.

So, if you ask a relative to buy a house on your behalf because you want to avoid ABSD, you may not be able to claim it back in a dispute even if you paid for it.

As ABSD has increased significantly for certain buyers, Prof Phua notes that the payoffs of tax evasion will also increase, and this may tempt some people to take a gamble.

Trust properties

Parents who buy property on trust for their children will now have to pay ABSD of 65 per cent upfront and they can get it refunded only if Iras is satisfied that the children are genuine beneficiaries and the arrangement meets certain conditions.

Before ABSD was imposed on trust from May 2022, such parents could make many conditions relating to their children’s rights over the assets.

That said, those who have ulterior motives of avoiding ABSD by using their children to hold property can end up with the short end of the stick because the law will not regard them as the owners.

In a recent High Court case, a man who had bought a property on trust for his son wanted to reclaim the asset during his divorce because he claimed that the trust was a sham to avoid ABSD.

Not only did his claim fail, he was also removed as a manager of his son’s trust because his actions showed that he was unfit for such a role.

Such cases show that when parents buy property on trust for their children, these assets belong to the children.

If the children eventually start their own families in these homes, their spouses can also stake claims on the real estate.

Instead of waiting for family disputes to expose secret trusts, perhaps the law could be tightened so that people are not tempted to take huge financial risks just to avoid ABSD, which is meant to keep home prices from skyrocketing.

Prof Phua says that if Singapore had rules to deter professionals from helping people to draw up abusive or sham schemes just to avoid taxes, such as the laws in New Zealand, Australia and Britain, people would think twice about coming up with new loopholes.

“It may be time to seriously consider extending the current civil penalties and criminal sanctions on third parties who actively assist otherwise compliant taxpayers to devise methods that undermine and frustrate taxation at the expense of public revenues,” he adds.

“A fair and effective tax system must not overlook the supply side of tax avoidance.”

The top 3 myths that spur investors to use ABSD loopholes

When it comes to taxes, action really speaks louder than words because what you have done matters more than your motives behind the transactions under scrutiny.

Here are the three key misconceptions that have landed property buyers in trouble because they used the 99-to-1 loophole to dodge the additional buyer’s stamp duty (ABSD).

1. ‘I am not the owner’

Some parents probably think it is all right to bend the rules a little just to help their children get on the property ladder.

Say your son wants to buy his first private home, but he does not earn enough to qualify for a bank loan. Previously, you could act as a guarantor for his mortgage, but tighter measures to deter property speculation mean banks will now allow only co-owners to borrow.

So, even if you qualify for a loan, you must come on board as a co-owner before the bank will approve the loan for your son’s purchase.

But, as you already own a property with your spouse, buying another one with your son will attract the new ABSD, which is 20 per cent for Singaporeans who buy a second property from April 27.

Unsurprisingly, many people will view ABSD as a hefty sum just to help their children apply for a mortgage.

This is probably why some buyers choose to exploit an ABSD loophole by splitting the purchase into two parts – the son signs the sale agreement alone because he will not need to pay the additional stamp duty as a first-time buyer. After this transaction is done, he sells 1 per cent of the property to his parent who would need to pay the relevant duties for only that small share.

While the second agreement makes you the legal co-owner, this transaction will attract the taxman’s scrutiny as it was contrived or done with the sole purpose of avoiding paying ABSD.

Helping children buy their first property is not a good excuse to circumvent ABSD because the measure also deters people from over-leveraging on real estate they cannot afford.

2. ‘It is fine to use loopholes’

Those who make such remarks are ignorant of tax laws.

The Inland Revenue Authority of Singapore is empowered to disregard any schemes or agreements that are designed to avoid paying tax and impose penalties on those who pull such stunts.

Technically, all loopholes, including blatant ones like the 99-to-1 agreements, are doomed to fail from the word go.

Lest you think that only the 1 per-centers are caught, similar arrangements to transfer higher portions of shares are likely to be caught as well.

Of course, some corporate tax planners challenged the taxman’s decision by appealing to the courts in the past.

Before you consider similar moves, you should know that the legal fees for pursuing such cases will be hefty, and you risk losing even more if you fail to substantiate your claim that your tax arrangement is legitimate.

3. ‘Tax avoidance is not illegal’

Yes, it is not illegal to avoid paying more tax, provided you do so by the book.

For instance, you will pay less tax on your income if you top up your own Special Account or that of your loved ones because you can enjoy up to $16,000 tax relief for such Central Provident Fund payments annually.

Similarly, if you own a residential property, you can avoid paying ABSD legally by selling your existing home first before buying a new one.

This is why “decoupling” – when one spouse transfers all shares in a property to the other spouse – is legal because owners are entitled to deal with their shares in a property in any manner that they want. While such an arrangement has the effect of avoiding ABSD, such couples have done no wrong because the spouse who is buying another property does not own any real estate after the decoupling.

The same cannot be said about those who use 99-to-1 deals because the co-owners in such cases still own existing homes. If both of them do not own any real estate, they can choose to buy and hold their property in any manner that they want, whether it is 50 to 50 or even 99 to 1.

The lesson here is this: Property investment is an expensive affair so it is vital that you get your sums right first because you risk losing the asset if you cannot keep up with rising mortgage rates. Never forget that over-leveraging is the reason why some people end up in huge debt.

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

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