Legal or Illegal? ABSD, 99-1 Ownership, and Decoupling: A Lawyer's Perspective

At Guardian Law, we as Singaporeans ourselves, understand that Singaporeans are known for our resourcefulness, especially when it comes to navigating complex regulations. However, this ingenuity can sometimes lead to tricky situations, particularly in matters of taxation. A prime example is the recent controversy surrounding 99-1 ownerships of properties and Additional Buyer’s Stamp Duty (ABSD).

You might have noticed ABSD making headlines lately. The Inland Revenue Authority of Singapore (IRAS) has been busy recovering a staggering $60 million from property investors who attempted to sidestep ABSDtax. Their method? A clever arrangement known as the “99-to-1” split, where one co-owner holds 99% of a property’s shares, and the other owns just 1%.

Don’t be fooled – uneven property shares don’t automatically exempt you from ABSD. There’s more to this story:

“How does this loophole really work?”

And given IRAS’s recent crackdown:

“Could it get you in trouble?”

Let’s simplify this complex issue and explore its impact on property owners and buyers in Singapore. We’ll help you understand the risks and make informed decisions about your property investments through a lawyer’s perspective:

_ “Are these practices legal or illegal?”_

Read on to find out. 🚀

What is ABSD?

ABSD is an extra tax you pay when buying residential property in Singapore. It applies to:

• Singapore citizens buying their second or later homes
• All home purchases by Permanent Residents (PRs) and foreigners.

Current ABSD Rates (as of April 27, 2023)

The rates vary depending on who you are and how many properties you own.

Singapore Citizens:

• First property: No ABSD
• Second property: 20% ABSD
• Third and subsequent properties: 30% ABSD

Singapore Permanent Residents:

• First property: 5% ABSD
• Second property: 30% ABSD
• Third and subsequent properties: 35% ABSD

Foreigners:

• Any residential property: 60% ABSD

Entities (including housing developers):

• Any residential property: 65% ABSD
• Housing developers face an additional non-remittable 5% ABSD

Housing Developers:

• Any residential property: 35% (remittable, subject to conditions) + 5% (non-remittable)

These rates are consistent with the official information provided by the Singaporean government. To learn more, you can refer to the Monetary Authority of Singapore (MAS) and the Inland Revenue Authority of Singapore (IRAS) websites.

🔎 Additional Resources

For the most current and detailed information on ABSD rates, remissions, and regulations, please refer to the official IRAS e-Tax guide on Additional Buyer’s Stamp Duty.

Note: These rates reflect a significant increase from the previous ABSD rates, particularly for foreigners and entities. The changes, implemented on April 27, 2023, are part of the government’s ongoing efforts to cool the property market and ensure housing affordability for Singaporeans.

What is Decoupling?

Decoupling is a legal process where one co-owner transfers their share of a co-owned property to the other co-owner. In Singapore, this strategy is often used by married couples to restructure their property ownership. Here’s how it typically works:

1. A couple buys their first property together, often with a 99-1 ownership split.
2. Later, the 1% owner transfers their share to the 99% owner.
3. The former 1% owner is then considered a first-time buyer for the next property purchase.

The main reasons people consider decoupling include:

• ABSD savings: To avoid or reduce Additional Buyer’s Stamp Duty on a second property purchase.
• Financial flexibility: Allows one spouse to buy another property as a first-time buyer.
• Investment opportunities: Opens up options for diversifying property investments.

However, decoupling involves costs such as legal fees, potential stamp duties, and loan restructuring. It’s important to note that while decoupling itself is legal, authorities scrutinise these arrangements closely, especially when they appear to be primarily for tax avoidance.

The “99-1 Loophole” Explained

The “99-1 loophole” is a strategy some buyers use to try and reduce their ABSD payments. Here’s how it typically works:

For example,

Mary (a first-time buyer) purchases 100% of a property, paying no ABSD. Mary then sells 1% of the property to Peter (who already owns a property). Peter pays 20% ABSD, but it only applies to the 1% share of the property that he is purchasing.

This method aims to pay less ABSD compared to if Mary and Peter bought the property together from the start, where they’d pay 20% ABSD on the full property value.

Is the 99-1 Scheme the Same as Decoupling?

While both involve a 99-1 ownership structure, they are not identical.

The key difference is that decoupling usually involves a couple’s first property purchase, while the 99-1 scheme IRAS is investigating often involves at least one party who already owns property.

Here’s a brief example to illustrate the difference between the 99-1 scheme and decoupling:

99-1 Scheme:

John (owns a property) and Mary (first-time buyer) want to buy a second property together.

1. John and Mary buys the second property with Mary 99% and John with 1%..
2. Mary’s 99% will not be subjected to ABSD. John would only need to pay ABSD on the 1% share. .

Decoupling:

Tom and Sarah (married, no properties) buy their first home with a 99-1 split.

1. Years later, Tom (1% owner) transfers his share to Sarah.
2. Tom, now owning 0%, buys a second property without ABSD.

The key difference is the starting point: In the 99-1 scheme, one party already owns property, while in decoupling, it starts with a couple’s first joint purchase.

Is Decoupling Illegal?

Decoupling itself is not illegal in Singapore.

It’s a legitimate process of transferring property ownership between co-owners, often used by married couples to restructure their property holdings. However, the legality depends on the intent and execution:

• If done for genuine reasons (e.g., changes in financial situation or relationship status), it’s generally considered legal.
• If the sole purpose is to avoid ABSD, it would be scrutinised by IRAS.
• The timing of decoupling is crucial. If done immediately after purchase, it may raise suspicions.

While decoupling is legal, it’s important to approach it carefully and with proper legal guidance to ensure compliance with current regulations.

So, back to the main question in this article:

“Is the 99-1 loophole legal?”

Let’s address this question and answer this from a legal perspective:

Is the 99-1 Loophole Legal? A Lawyer’s Perspective

Answer: Yes, it is legal when it’s not done to avoid ABSD, and you have a legitimate reason for the arrangement.

However, legality depends on intention. IRAS scrutinises such arrangements and if it finds that your sole consideration was for tax avoidance, they would not hesitate to charge ABSD on the full purchase price. Plus a 50% penalty 😰😵‍.

Here’s a breakdown:

• The ownership structure (99-1 split) is legal under Singapore law.
• However, if IRAS determines the arrangement was made solely to avoid ABSD, it can be deemed as tax avoidance.
• IRAS is actively investigating cases where 1% of the property is being purchased by a person who already owns a residential property. If found to be avoiding taxes, individuals could face penalties, including a 50% surcharge on the payable ABSD amount.

While not criminal, tax avoidance through the 99-1 scheme can result in significant financial penalties. It’s crucial to have genuine reasons for such arrangements beyond tax savings and to seek professional advice before proceeding.

Recent Developments and IRAS Crackdown

Singaporeans have been using this strategy for some time, but it’s only recently that the 99-1 loophole has gained significant attention. The reason? The government has started to investigate these arrangements.

Why is everyone talking about the 99-1 scheme now?

In 2023, IRAS began probing 99-1 property scheme cases to determine if home buyers were using it primarily to avoid paying ABSD. As of April 2024, IRAS has completed the review of 187 such “99-to-1” cases, of which 166 cases were found to have involved tax avoidance. About S$60 million in ABSD and surcharges were accordingly clawed back.

This statistic highlights the scale of the issue and the government’s serious approach to addressing it. It also serves as a warning to property buyers considering similar arrangements.

You can read the full article here.

Breaking News: First Prosecution for 99-1 Scheme

Source: Channel News Asia
Article Date: 22 September 2024

Article Title: “Mother and son charged with lying to IRAS over 99-to-1 property purchase in first such prosecution”

Overview:

In a significant development, Singapore has seen its first prosecution related to the 99-1 property ownership scheme. As reported by Channel News Asia on 20 September 2024, a mother and son have been charged with providing false information to IRAS regarding a 99-1 property purchase.

Key points from the case:

1. The accused allegedly lied about their relationship to avoid paying Additional Buyer’s Stamp Duty (ABSD).
2. They face charges under the Stamp Duties Act for providing false information.
3. If convicted, they could face up to two years in jail, a fine of up to S$10,000, or both.

This case underscores the seriousness with which authorities are treating potential misuse of the 99-1 ownership structure and their approach when providing false information. It serves as a stark warning to property buyers considering similar arrangements.

IRAS’s stance:

• IRAS reiterates its commitment to recovering unpaid stamp duties and imposing penalties on those found to have avoided taxes.
• The agency encourages voluntary disclosure of any past arrangements that may have contravened tax laws.

This prosecution marks a turning point in the enforcement of property tax laws in Singapore, highlighting the potential legal consequences of attempting to circumvent ABSD through questionable ownership structures.

6 Potential Consequences of Improper 99-1 Implementation

If IRAS determines that a 99-1 ownership structure has been used primarily for tax avoidance, the consequences can be significant:

Consequence 1: Legal Scrutiny

• Your case may be subject to further investigation, potentially leading to legal complications.

Consequence 2: Full ABSD Payment

• You may be required to pay the full ABSD amount that would have been due on a joint purchase.

Consequence 3: Substantial Penalties

• IRAS can impose a 50% surcharge on the unpaid ABSD amount.

Consequence 4: Escalating Fines

• If the amount due is not paid by the deadline, penalties can increase to up to four times the original amount owed.

Consequence 5: Financial Strain

• The unexpected tax bill and penalties can cause significant financial stress.

Consequence 6: Reputational Risk

• Being identified in an IRAS investigation could have personal and professional repercussions.

Be sure to approach 99-1 ownership structures with caution and ensure they are implemented for legitimate reasons beyond tax avoidance.

When Might 99-1 Transactions Be Allowed?

IRAS may accept 99-1 transactions if there’s a genuine commercial reason for the ownership structure that isn’t about avoiding ABSD.

Here’s an example:

Let’s say Sarah and Tom are business partners planning to invest in a commercial property. Sarah has more capital to invest and will be more involved in managing the property. They agree that Sarah will own 99% of the property, while Tom will own 1%. This reflects their investment proportions and involvement in the business venture.

In this scenario, the 99-1 split has a legitimate business purpose:

1. It reflects the partners’ financial contributions
2. It aligns with their roles in managing the property
3. It’s not primarily aimed at avoiding ABSD

IRAS is more likely to view such an arrangement favourably because it’s based on genuine commercial considerations rather than tax avoidance.

However, it’s crucial to document the reasons for this ownership structure and be prepared to explain them if questioned by IRAS. Always consult with a legal professional to ensure your arrangement complies with current regulations.

What Should You Do?

If you’re considering or have already used a 99-1 ownership structure:

1. Consult a lawyer for professional advice.
2. Ensure you have a legitimate reason for the ownership structure beyond tax avoidance.
3. If you’ve already used this arrangement, consider making a voluntary disclosure to IRAS.

⚠️ Remember, IRAS can review past stamp duty cases without time limitations. Voluntary disclosure might be viewed more favourably by the authorities.

For a detailed guide on what steps to take if you’ve already utilised the 99-1 arrangement, you can read our article - “Navigating ABSD Concerns: A Guide for Property Owners Who Used the 99-1 Ownership Arrangement”.

How Guardian Law Can Help

• Expert legal advice: We’ll guide you on the implications of 99-1 ownership and the best course of action for your situation.
• Compliance assistance: We’ll ensure your property transactions comply with current IRAS regulations, minimising future risks.
• Documentation review: Our team will prepare and review all necessary legal documents for property transfers and ownership changes.
• IRAS inquiry representation: If you’re facing an IRAS investigation, we’ll represent your interests throughout the process.
• Voluntary disclosure guidance: We’ll advise on the pros and cons of making a voluntary disclosure to IRAS and assist you if needed.

Conclusion

99-1 ownership can be a useful strategy, but it comes with risks. IRAS is watching these arrangements closely. Before choosing this option, think carefully about your long-term plans and get expert advice.

Need Help?

Ready to navigate the complexities of 99-1 ownership and property decoupling?

Our team at GuardianLaw is here to assist you.

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Frequently Asked Questions

What is 99-1 ownership?

99-1 ownership is a property structure where one owner holds 99% of the property and the other holds 1%. This arrangement is often used to optimise tax benefits and investment opportunities, especially in the context of Singapore's property market.

Is 99-1 ownership legal in Singapore?

Yes, 99-1 ownership is legal in Singapore when implemented with genuine intent for co-ownership. However, it must comply with regulations, and authorities like IRAS may scrutinise arrangements that appear to be primarily for tax avoidance.

Why would someone choose a 99-1 ownership split?

A 99-1 split can potentially help reduce Additional Buyer's Stamp Duty (ABSD) on future property purchases and offer more flexibility in property investments. It allows one party to be considered a first-time buyer for subsequent purchases.

What are the risks of 99-1 ownership?

Risks include increased scrutiny from IRAS, which may view the arrangement as a tax avoidance scheme. Additionally, it can complicate matters during divorce proceedings and make it harder to secure favourable loan terms from banks.

Can 99-1 ownership affect divorce proceedings?

Yes, the 99-1 split can complicate asset division during a divorce, especially if it doesn't reflect the true financial contributions of both parties. Courts may also question the intent behind the ownership structure, further complicating the process.

What should I consider before opting for a 99-1 ownership structure?

Before choosing a 99-1 ownership structure, consider your long-term property goals, potential tax implications, and the legal risks involved. It's crucial to ensure the arrangement aligns with genuine co-ownership intentions and to seek professional advice to navigate the complexities.