The Property Purchase 99-1 Arrangement in Singapore

What is considered legal and What is considered as Illegal in Property Purchase 99-1 Arrangement in Singapore ?

What is the difference between the two?

In this article, there will be an illustrative case study to uncover the risks, rewards and consequences of the 99-1 arrangement in Singapore. The example illustrated in this article about the couple, John and Janet ( both Singaporeans ) are fictitious couple . The example serves as a guide on navigating the 99-1 arrangement legally while avoiding potential pitfalls.

Understanding ABSD in Singapore

In Singapore the Additional Buyer Stamp Duty ( ABSD ) is a tax imposed on property buyers of residential property in Singapore, particularly for those purchasing a second or subsequent property will incur the ABSD on top of the standard Buyer Stamp Duty ( BSD ). The ABSD rates were increased after the latest cooling measures introduced in April 2023.

For John, lets say if he owns a condominium , he would face a 20% ABSD if he wanted to co-own a new property with Janet, as it will be considered as a 2nd property for John. Therefore an extra $200,000 in ABSD will be payable if they purchase a $ 1 million property together.

Types of Property Ownership

Before purchasing a property, John and Janet will have to decide how to structure their property ownership. There are 2 options :

(1) Joint Tenancy

Both parties share equal property ownership ( 50-50 ) . Upon the death of one owner, their share automatically passes to the surviving owner, a concept known as "right of survivorship.". 

(2) Tenancy-In-Common

Each co-owner holds a specified share of the property, which could be any ratio ( eg. 70%-30%, 99%-1% or 60%-40%, any combination that makes up 100% ). In case of death of one party, the deceased's share is distributed according to Singapore intestate succession laws or their will , if there is any.

In the example for this article, John and Janet opted for the Tenancy-In-Common arrangement with Janet owning 99% and John 1%.

The following is an illustration of The Illegal 99-1 Loophole . It is for knowledge purpose only and not allowed to do so.

John and Janet have heard about the so-called "99-1 loophole ", where the primary owner would first buy the property in full 100% ownership. Later sell a small share ( typically 1% ) to a co-owner who already owns another property.

To illustrate how this works :

1. Janet buys 100% of the property as a first-time buyer, thus avoiding ABSD.

2. Janet sells 1% of the proerty to John who pays ABSD only on that 1% share.

Example Illustration :

- Property Purchase Price : $1,000,000

- Janet buys 100% and avoids ABSD.

- Janet then sells 1% to John for $10,000

- John pays only $2,000 in ABSD ( 20% of $10,000 he purchased from Janet ) thus avoiding the full ABSD of $200,000.

The Consequences :

Janet and John believed they had found an intelligent way to reduce their tax liability. But their excitement was short-lived. The IRAS ( Inland Revenue Authority of Singapore ) had begun investigating suspicious tax avoidance transactions involving the 99-1 arrangement. To date, IRAS has found 166 cases exploiting this loophole , resulting in a clawback of $60 million in ABSD . This was in the news on 8th May 2024.

In such a transaction, Janet and John were deemed to be engaging in a tax avoidance scheme. They can be ordered to pay the full ABSD of $200,000 and a 50% penalty amounting to an additional $100,000.

The Legitimate 99-1 Arrangement

The 99-1 property ownership arrangement in itself is not illegal . Adopting a share splitting structure of any permutation to purchase a property is not illegal. But what is illegal is the scheme engineered to intentionally avoid tax.

99-1 loophole VS Decoupling

For decoupling, both parties purchase the property together , unlike 99-1 loophole, one party "fronts " the purchase first then sells 1% share to another party.

Penalties for illegal 99-1 Arrangements

- IRAS can reassess any property purchase and recover the rightful ABSD with a 50% surcharge on the underpaid ABSD will be imposed.

- In extreme cases, penalties can reach up to 400% of the amount undercharged.

When are 99-1 Transactions considered legal by IRAS?

(1) Bona Fide Commercial Reasons :

• Co-investing the property where the ownership share is divided based on investment ratios

• Couples were maximizing loan eligibility for their primary residence.

(2) Authority Under Section 33A :

• The illegal "99-1 loophole" arrangement is considered as two transactions, where one party purchases 100% in full ( one transaction ) and subsequently sells a small share ( typically 1% is another transaction ).

• IRAS can disregard individual transactions and treat them as a single joint purchase if they suspect tax avoidance.

For Financial Security

After comparing the differences between illegal 99-1 loophole and the legal 99-1 arrangement, Janet and John sought a trustworthy real estate consultant to refine their investment strategy. With a comprehensive understanding of the ABSD rules, they moved forward with their property investiment goals.

Expanding their Portfolio

With a financial foundation established through their first legal 99-1 arrangmeent, Janet and John may also explore expanding their portfolio strategically in the future.

Janet and John did not have to stop at two properties. They can diversify their investments and explore other strategies while remaining within the legal boundaries.

1. Diversifying Property Types

• Residential and Commercial Properties : They can balance their property portfolio with a good mix of residential and commercial properties.

• Different Locations : They can spread their investments across various districts to minimize regional market risks.

2. Investing in REITs

• They can invest in real estate investment trusts ( REITs ) .

• This can expose them to the property market without owning more properties directly,

Main Principles :

1. Consult Professionals : Consult a lawyer or real estate consultatnt when considering complex property transactions.

2. Know the Rules : Understanding the implications of ABSD and tax avoidance.

   
   

3. Document Everything : Keep accurate records and provide transparent documentation to IRAS.

   
   

4. Diversify Wisely : Explore different investment avenues to balance risk and optimize returns.