Paying a high price for avoiding stamp duty

SINGAPORE: Using a hefty retrenchment payoff to snap up an investment property looked like a smart move at first glance but a former sales manager only ended up buying herself a world of financial pain.

The 59-year-old woman received more than S$200,000 for being laid off from her job and decided to invest in a property for her daughter.

But the purchase in 2021 turned out to be a nightmare, with the woman – we will call her Jane – claiming that she was misled by the real estate agent and the lawyer involved in the deal to use the now infamous “99-to-1” sham.

This is a ruse to avoid paying the full additional buyer’s stamp duty (ABSD), which is levied on Singaporeans who buy a second property or more.

As Jane was jobless, she went into the deal only because the agent and lawyer convinced her that the 99-to-1 agreement was legitimate and that she needed to pay ABSD only on her 1% stake because her daughter would hold 99%.

All was well until the Inland Revenue Authority of Singapore (Iras) told her in 2023 that she had run afoul of the law because she had used a sham agreement to avoid paying the applicable ABSD, which was about S$113,000 at the point of purchase.

In addition to the unpaid tax, she was slapped with a 50% penalty, or about S$56,500, which meant she had to pay an eye-watering sum of almost S$170,000.

“It was a total nightmare because I suffered the double whammy of being retrenched from my job and then being misled by both the agent and the lawyer. They made me sign that agreement, which caused me to lose almost all my retrenchment money,” says Jane, who is divorced.

The saga was especially distressing because being unemployed with no income meant there was no need for her to be even involved in the deal. Her 28-year-old daughter, who works in the healthcare industry, was eligible for a loan to buy the S$900,000 home by herself.

Before “99-to-1” was reported as a tax avoidance scheme in 2023 by Invest after learning about the audit by Iras, many investors had exploited it as a loophole to avoid paying the bulk of the applicable ABSD.

They would rope in relatives who did not own any real estate to front the initial purchase to avoid paying any ABSD. But once the sales agreement was signed, the owners would then transfer a 1% share to relatives who own properties.

If both parties had bought the home jointly from the start, the full ABSD would be payable as one of them already has a property. But by splitting the process into two parts, they thought they could outwit the taxman by paying ABSD on only that tiny share.

In such cases, the 1% buyers were needed as joint owners because the initial purchasers could not get bank loans by themselves.

But such dubious deals did not go undetected by the Iras because there was no real purpose in executing the second transfer of 1% for the bulk of such cases other than to escape paying the full ABSD.

A subsequent audit caught around 166 buyers who practised this ruse. As Jane found to her horror, the offenders were ordered to pay the correct amount of ABSD due, along with a 50% penalty.

A total of about S$60mil in ABSD and surcharges has been clawed back so far. About 10 cases with evidence of potential involvement by property agents are also under review by the Council for Estate Agencies.

Jane, an advertising sales manager for two decades, booked a new S$900,000 apartment in MacPherson in 2020 not long after being retrenched. But she changed her mind and decided to buy a friend’s resale apartment as it was offered at a discounted price.

That meant cancelling her initial booking and forfeiting S$12,000 of her deposit. But her property agent persuaded her to proceed with buying the MacPherson unit by letting her daughter take over her booking.

Jane says the agent claimed that the developer would approve the change of booking to her daughter’s name only if Jane remained as a joint owner.

“I found it strange that my daughter could buy the unit herself. I told the agent I was not prepared to pay high ABSD and would rather forgo the deposit. But he kept insisting there would be no problem and even arranged for a lawyer to get this done,” says Jane, who never once dealt with the developer.

It was not known why the agent claimed that the developer had insisted that Jane remain as co-owner. Indeed, the sales agreement that was eventually signed had only one name – her daughter’s.

There was no official note from the developer telling Jane that she had to later be a co-owner because it is not the norm for buyers to sign two agreements for the same property.

“As I was unfamiliar with the property rules, I just followed the advice of the lawyer and signed all the documents that were prepared,” says Jane.

“Looking back, I feel so stupid in signing the 99-to-1 agreement because my daughter could buy (the property) herself as she earned a decent salary.”

Leading tax expert Stephen Phua, an associate professor at the National University of Singapore’s law faculty, says the real estate agents and lawyers who were involved in the 166 cases caught by Iras could be liable for helping clients to enter into such arrangements.

For instance, agents who misled buyers like Jane into thinking that they could use the 99-to-1 agreement to avoid paying the bulk of the ABSD would be liable.

“Such advice would be negligent or unlawful if the court rules that the arrangement falls foul of the anti-avoidance rule,” Prof Phua says.

By the same token, he notes that lawyers have a duty to warn clients of the potential risks of doing such deals.

As the intention of the 99-to-1 agreement was to avoid paying 99% of the ABSD, a client penalised for tax avoidance may argue that the lawyer had failed to highlight this risk and warn the client against such deals.

While lawyers are usually insured against negligence for such work, real estate agents are not because their insurance may not cover deeds committed beyond their scope of work.

Jane is seeking legal advice on filing claims against both her agent and lawyer for allegedly misleading her into signing the 99-to-1 deal.

“Both of them were paid for the property deal but I am the only one who has to face the music from Iras. I don’t think this is fair as I lost my hard-earned money, no thanks to their bad advice.” — The Straits Times/ANN