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Exploring the 99-to-1 Property Share Split: Legality and Risks [Updated]
Viewed by 10,238 Smart Towkays
The article was published on 06 April 2023, and was most recently updated on 27 April 2023
The Inland Revenue Authority of Singapore (IRAS) is currently investigating a group of home buyers who have used a loophole to avoid paying Additional Buyer's Stamp Duty (ABSD). The loophole, known as the '99-to-1' scheme, allows buyers to purchase a property with only 1% ownership, thereby avoiding the ABSD which is imposed on those who own more than one property. In this article, we will discuss the details of this scheme and answer some frequently asked questions about the IRAS investigation.
The '99-to-1' property share split has been making headlines in Singapore due to its potential to circumvent ABSD, a tax imposed on those who own more than one property. While this loophole has been used by some buyers, the IRAS is currently investigating a group of home buyers who have used this scheme to avoid paying taxes.
Legality of the 99-to-1 Property Share Split
Understanding Additional Buyer's Stamp Duty (ABSD) and its implications
The Additional Buyer's Stamp Duty (ABSD) is a tax imposed by the Singapore government on those who own more than one property. The purpose of this tax is to discourage property speculation and curb rising property prices.
The ABSD rates were implemented for the first time in December 2011 to regulate demand for residential property. On 27 April 2023, the rates were raised again, resulting in Singapore citizens having to pay
17% 20%, 25% 30% of the purchase price for their second or third residential property today, respectively.
Read also: Updated Additional Buyer's Stamp Duty (ABSD) w.e.f 27th April 2023
Legal Framework of Property Share Splitting
In Singapore, property share splitting is legal as long as it is done in a transparent manner. The IRAS requires buyers to disclose the true ownership of the property, and any attempt to hide or misrepresent the true ownership can result in penalties and legal action.
Example: When two people want to buy a property together, they can either do it in equal shares (50/50) or in different shares (like 99/1). If they buy the property as 99/1 TIC (Tenants-in-Common) from the beginning, then they have to pay the applicable ABSD (Additional Buyer's Stamp Duty) based on the higher rate of both individuals.
But some people try to avoid paying the higher ABSD rate by buying the property in one person's name first and then having the other person buy 1% share of the property shortly after. This way, they pay a lower ABSD rate. However, if their intention was always to buy the property as 99/1 TIC, and they did this to avoid paying higher ABSD, then it's considered illegal.
So, the key thing is the intention and timing of the purchase. If the purchase of the 1% share is done shortly after and with the sole intention of reducing ABSD payable, then it's considered illegal by the IRAS (Inland Revenue Authority of Singapore).
While property share splitting is legal, buyers need to be aware of the legal risks involved. The IRAS has the power to investigate and penalize buyers who use this scheme to avoid paying ABSD.
And so? The main issue threading the needle here is that the Additional Buyer's Stamp Duty (ABSD) can pose a challenge to individuals seeking to own multiple private properties due to their ever-increasing high prices. The real estate investment community has suggested various strategies to circumvent the ABSD, including the 99-to-1 property share split method, which has been a source of confusion in recent years.
Latest Update: IRAS Risk-Based Approach Against Non-Compliance And Tax Avoidance
For Buyers: In Favour To Pay ABSD Voluntarily
So, the Inland Revenue Authority of Singapore (IRAS) has come up with a new approach to dealing with Additional Buyer's Stamp Duty (ABSD) non-compliance. Basically, if you happen to have more than one property, you'll need to pay either
17% or 25% 20% or 30% ABSD depending on how many properties you own. And if you already own a property and decide to buy another one with a first-time owner, you'll still have to pay the full ABSD amount.
Now, if you do get caught trying to avoid paying the ABSD for your second (or more) property, you'll have to cough up the outstanding amount plus a minimum 50% surcharge as a penalty. Not good! But, if you come forward and voluntarily disclose your non-compliance, IRAS will be more lenient and look at your case more favorably. Just so you know, IRAS uses a risk-based approach to detect and enforce non-compliance and tax avoidance.
For Lawyers: Accountability and Duty Upon Drafting Agreements
According to the Inland Revenue Authority of Singapore (IRAS), the government is taking a tough stance on people who promote or facilitate tax avoidance arrangements.
If lawyers are found to have a duty to highlight such risks when drafting agreements, they too will be held accountable. For property agents, the Council for Estate Agencies will be responsible for investigating and taking disciplinary action if necessary. Depending on the severity of the breach, agents could face financial penalties and/or suspension of their registrations.
Inland Revenue Authority of Singapore (IRAS) appreciated the compliant taxpayers for their contribution to Singapore's fair and progressive tax system.
This system will undeniably ensure that people with higher incomes pay more while the ones with lower incomes receive more assistance. This approach towards taxation creates a level playing field and supports the vulnerable sections of society.
Types Of Property Ownership In Singapore
Before we discuss the 99-1 property ownership method, it's critical to comprehend how Singaporeans conform to real estate.
In general, there are two ways that we can hold our property. Joint tenancy is the first method. In this type of ownership, each party holds equal rights and responsibilities of the property which means that the surviving co-owner is to receive the full property upon the passing of the other owner without the requirement for a will, this form is frequently employed by couples.
Another way to hold property is through tenancy in common, which is often used for investment purposes. Two co-owners each own a specific number of shares in the property, which can be split in any ratio. If a co-owner passes away, their shares do not automatically go to the remaining co-owners, and the deceased's interests are distributed according to their will or the Intestate Succession Act.
Therefore, to use the 99-1 property ownership strategy, if you are a property buyer, you should choose tenancy in common as the way to hold their property.
Buying Property Under A 99/1 Tenancy In Common
Due to the ABSD policy in Singapore, there has been a growing trend among married couples to acquire and hold private properties under Tenancy In Common ownership. This allows for easier decoupling and the potential purchase of a 2nd property without ABSD in the future.
Why? It is greatly due to this property purchase model offers advantages like a larger loan amount than one could normally apply to and the use of both owners' CPF monies, resulting in lower upfront cash payments.
Also, it allows for easier decoupling in situations where one owner holds a higher percentage of the property.
In the case of a 99% stakeholder purchasing the remaining 1% stakeholder's interest in a property worth $1,000,000, the cost would be $10,000 x 1%= $100 Buyer stamp duty fee only. Additional fees, such as those for conveyancing fees, would apply.
This is easily an illegal hack, as we may now agree on that...
What You Should Know About Legal Framework Governing Property Transactions?
The primary legislation governing property transactions in Singapore is the Land Titles Act, which establishes the system of land registration and land transfer in the country.
The Singapore Land Authority (SLA) is the agency responsible for managing land transactions and registration in the country. The SLA oversees the land registration process, maintains the land register, and manages the issuance of land titles.
Property transactions in Singapore typically involve several parties, including buyers, sellers, real estate agents, lawyers, and financial institutions. Property transactions must comply with the regulations established by the SLA, as well as other government agencies such as the Inland Revenue Authority of Singapore (IRAS) and the Urban Redevelopment Authority (URA).
Things To Consider Before A 99/1 Split Tenancy In Common
Both owners' incomes are used to determine the loan amount during purchase. If they split up, the remaining owner must be able to take on the balance loan amount or pay the excess in cash or CPF monies.
The Utilization of CPF To Affect Split Percentage
The split percentage in a property ownership arrangement can be significantly impacted by how CPF monies are utilized by the party intending to exit. For example, if the intended leaver has used a substantial amount of CPF monies, say $100,000, towards the down payment and monthly mortgage loan servicing, it may not be feasible to have a 99/1 Tenancy in Common split without paying a lump sum of cash (subject to CPF's approval for waiving of CPF loss).
Monthly Mortgage Payment
In a property ownership arrangement, if one owner leaves, only the remaining owner's CPF funds can be used to pay the mortgage. Any remaining balance after CPF deductions must be paid in cash.
It's important to note that CPF contributions can only be used for specific purposes, including the payment of monthly mortgage installments. The amount of CPF that can be used for mortgage payments depends on factors such as the outstanding loan balance and the age of the property owner. CPF monies cannot be used to pay for other expenses related to the property, such as maintenance or renovation costs.
Furthermore, it's essential to keep track of your CPF account and ensure that you have enough funds to cover the monthly mortgage payments. If you don't have sufficient CPF monies, you will need to pay the balance in cash, which can impact your monthly budget. Therefore, it's crucial to plan and budget your expenses carefully, taking into account your CPF contributions and other sources of income.
In summary, understanding how CPF monies can be used for property ownership and mortgage payments is crucial, especially when one owner decides to exit the arrangement. It's always necessary to plan and budget your finances carefully and ensure that you have enough CPF monies and cash to cover the monthly mortgage payments and other related expenses.
Relationship & Trust
Relationships are important to consider when investing in property. It's helpful to plan for exit solutions in case the relationship turns sour. Quarrels and fights over assets can happen between couples, siblings, and even parents and children. If there isn't enough trust in the relationship, a minor stakeholder may feel insecure about co-investing in another property.
When a couple from Singapore, with one spouse from another country, is purchasing their first home together, this is how it works.
In this case, regardless whether they are going to buy one property or has intention to own two properties eventually, this method will help them save on ABSD.
Couples purchasing their first matrimonial home, with a foreign spouse, may qualify for ABSD remission resulting in no ABSD payment for the property.
In the event of the couple's decision to purchase a second property, the foreign spouse currently holding 99% ownership will acquire the remaining 1% from the outgoing spouse, who must be a citizen. Following the separation, the outgoing spouse will not possess any property in their name, and will therefore not be subject to ABSD for the subsequent property.
Conclusion: Recommendations for Buyers
How to avoid legal and financial risks when purchasing property in Singapore
Buyers can avoid legal and financial risks when purchasing property in Singapore by being transparent about the true ownership of the property and complying with all regulations and taxes.
And those of you who want to purchase property in Singapore should seek professional advice like us at Smart-Towkay and ensure that you fully understand the legal and financial implications of property ownership and taxation in Singapore.
Ethical and transparent business practices are crucial in the Singapore property market. Buyers who engage in unethical or illegal practices may face legal and financial consequences, as well as damage to their reputation.
According to a common financial theory, having two properties is recommended for families - one for personal use and the other for rental income. Owning only one property may require purchasing a replacement home at inflated prices regardless of appreciation.
Owning two properties can provide passive income through renting, but it requires a commitment to servicing both home loans for the next 30 years.
When considering property ownership, it is important to remember that paying the monthly mortgage loans over a significant period of time can be a source of stress. As such, the 99-1 property ownership strategy may not be suitable for everyone.
To conclude, the '99-to-1' property share split may seem like an attractive option for buyers who want to avoid paying ABSD, but it comes with significant legal and financial risks.
Update On Whistleblowers: Reporting Private Property Buyers Using "99-to-1" Scheme
Recent news from the Inland Revenue Authority of Singapore (IRAS) in April 2023 might pique your interest. In a bid to curb tax evasion or reduction through the use of "99-to-1" or similar schemes, the IRAS is offering rewards of up to $100,000 to whistle-blowers who report private property buyers using these tactics.
If you have information and/or documents that lead to the recovery of additional buyer's stamp duty (ABSD), you could be in for a cash reward based on 15% of the tax recovered. The reward is capped at $100,000 for each case, so you could potentially earn a hefty sum!
This is an excellent opportunity for those who want to do the right thing and report any tax evasion they come across. Plus, the reward could be a significant boost to your finances. So, keep your eyes peeled, and if you come across any information that could lead to tax recovery, don't hesitate to report it to IRAS.
Frequently Asked Questions
What is the '99-to-1' loophole and how does it work?
The '99-to-1' loophole allows buyers to purchase a property with only 1% ownership, while the remaining 99% is held by a company or trust. This allows the buyer to avoid paying ABSD as they technically do not own more than one property. The company or trust holding the majority share is usually controlled by the buyer, giving them effective ownership of the property.
Who are the buyers being investigated by IRAS?
The IRAS is investigating a group of home buyers who have used the '99-to-1' scheme to avoid paying ABSD. Senior Minister of State for Finance Chee Hong Tat revealed that between 2018 and 2021, around 0.5% of private residential properties sold in Singapore involved purchase arrangements where the owners sold a partial interest in the home to another buyer within a short period of time. This was in response to questions by MPs about such arrangements. These purchase arrangements are often 99-to-1 or similar and may be used to avoid paying a higher Additional Buyer's Stamp Duty (ABSD).
What are the potential consequences for these buyers if found guilty?
If the buyers are found guilty of intentionally evading ABSD, they could face penalties of up to four times the amount of the duty evaded, as well as fines and possible criminal charges.
Is the '99-to-1' scheme illegal?
The '99-to-1' scheme is not illegal, but using it to avoid paying ABSD could be seen as an intentional act of tax evasion, which is illegal.
What does this investigation mean for the Singapore property market?
The IRAS investigation highlights the government's efforts to crack down on tax evasion in the property market. It also serves as a reminder to buyers and investors to carefully consider the legal and tax implications of their transactions. This could lead to more transparency in the market, as well as deterrence for those considering similar schemes in the future.
How about the Property Agents that recommend this scheme to their buyers, will they be implicated?
The Council for Estate Agencies will be responsible for investigating and taking disciplinary action if necessary against property agents. Depending on the severity of the breach, agents could face financial penalties and/or suspension of their registrations.
Will lawyers be held accountable if they fail to highlight tax avoidance risks when drafting agreements?
Yes. According to an update from IRAS, the government is taking a tough stance on people who promote or facilitate tax avoidance arrangements. Lawyers found to have a duty to highlight such risks when drafting agreements will be held accountable.
What happens if I own more than one property in Singapore?
If you own more than one property in Singapore, you'll need to pay either
17% or 25% 20%, or 30% ABSD depending on how many properties you own. If you decide to buy another property with a first-time owner, you'll still have to pay the full ABSD amount. If you're caught avoiding paying the ABSD, you'll have to pay the outstanding amount plus a minimum 50% surcharge as a penalty. However, if you voluntarily disclose your non-compliance, IRAS will be more lenient and look at your case more favourably.
The Inland Revenue Authority of Singapore (Iras) is offering a reward of up to $100,000 or 15% of the tax recovered, whichever is lower, to whistle-blowers who report cases of private property buyers using "99-to-1" or similar arrangements to evade or reduce ABSD, provided that the information and/or documents provided lead to tax recovery.
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