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.”
“Source:[Investors who exploit ABSD loopholes have more to lose than gain] © Singapore Press Holdings Limited. Permission required for reproduction”
