Taking on the taxman is ultimately a loser’s game given the agency’s wide-ranging power to strike down sham processes designed to escape paying levies.
The one-sided nature of the contest is especially evident in the case of property deals.
It is easy to uncover attempts by Singapore buyers to avoid paying higher taxes such as the additional buyer’s stamp duty (ABSD) for second and subsequent properties because all transactions are well documented and tracked by the Inland Revenue Authority of Singapore (Iras).
If you buy a property, you must pay the basic stamp duty chargeable on all such deals. So if there is a bid to avoid paying the ABSD, like using the “99-to-1” gambit to transfer a 1 per cent stake to another owner after the first purchase agreement is signed, the Iras would be on the alert.
This is because it is “abnormal” for two transactions to take place for a single property within a short time unless the owners are scheming to avoid paying ABSD.
Of course, some crafty investors think they can beat the system by paying for the property in full and then have the asset held in the sole name of a relative who does not own any real estate.
But recent changes in the law have made such ruses more trouble than they are worth.
Buying a property under a trust now requires an upfront ABSD of 65 per cent of the purchase price. Such payments can be refunded only if the buyers can show the trusts are genuinely set up to give the property to beneficiaries.
But as these cases show, you may end up losing the entire asset if the registered owner refuses to let you share the property.
Using trust to avoid ABSD
A man bought a $5 million home to be held in trust for his son in July 2020, when no upfront ABSD was needed. The money came from the sale of his other properties.
About a year after the purchase, the father’s marriage broke down and his wife filed for divorce. As a result, the son applied to the court for the trust to be terminated so that he would become the legal owner immediately.
His father argued that the asset was his all along because the trust was a sham set up to avoid paying the ABSD.
The High Court ruled that the trust was not a sham because the evidence showed that during their better times, the couple had intended to make their son the eventual owner of the property. As a result, the man lost the unit as the court ordered it to be transferred to the son.
Father acted against his son’s interests
In another case, the parents bought a $1.5 million condominium unit and put it in a trust for their elder son while they would manage or lease it as the trustees. All was well until their marriage failed, and the husband staked his claim to the unit.
He argued that the condo did not belong to his son because the trust was a sham to dodge the ABSD. The man added that his former wife came up with the idea to hold the property this way and he went along with it only because of her “undue influence”.
But High Court Judge Kannan Ramesh did not buy his story because the husband, who is a civil servant, is educated and intelligent. It was most unlikely that he would have been ignorant of the potential ramifications of trying to evade taxes, given the impact this could have on his career, the judge added.
As the man sought to undermine the son’s interest, the judge also approved the former wife’s application to have him removed as a trustee for the property.
You should know that legal tools are not there for you to get someone to hold real estate on your behalf. As these cases show, you may want to save on taxes, but you will likely end up losing the property.
“Source:[Why property investors who avoid ABSD can risk losing more] © Singapore Press Holdings Limited. Permission required for reproduction”
