Navigating Real Estate Investments: Understanding the 99-1 Strategy vs Decoupling
In this video, we shall explore and understand the difference between 99-1 and decoupling strategy. We also aim to explain how investors use both methods to avoid Additional buyer Stamp Duty (ABSD) and why one is consider a loophole while the other is not.
The recent government crackdown on 99-1 cases and my potential clients considering decoupling has led me to share this important information.
If the burning questions that you have include: “Is the government coming after decoupling”, and “What is the main difference between the two methods?”, pay close attention to this article.
What is the 99-1 Loophole?
In April 2024, the IRAS (The Inland Revenue Authority of Singapore) announced its decision to reclaim 60 million dollars from 166 private properties that were exploiting the 99-1 loophole.
This loophole involves individuals opting for a 1% subsidy instead of purchasing properties jointly. This was approved by the current Finance Minister Lawrence Wong who, because of his previous experiences as the National Development Minister, understands the exploitative nature of a number of loopholes and intends to clamp down on them.
Lawrence’s statement highlights the key focus on the “single joint purchase” concept by IRAS. He’s basically emphasizing questioning why individuals opt for a subsidy instead of jointly purchasing properties. This scrutiny indicates IRAS’s intention to examine the necessity of resorting to sub-sales instead of collective purchases.
Let me illustrate the concept of the 99-1 property arrangement and how individuals have been taking advantage of this loophole. Consider two individuals: Person A and Person B. Person A does not own any property, whereas Person B owns one or more properties. For the sake of this example, assume Person A is the son of Person B. As a younger individual, Person A is likely still completing his studies, meaning he does not have CPF savings and is not eligible for a bank loan.
Person B, the parent, wishes to purchase a property for his son. If they proceed with purchasing a $1 million property, they would face significant additional taxes. Since Person B already owns property, he would incur an additional Buyer’s Stamp Duty (ABSD) of 20% of the property’s value, or 60% if he is a foreigner. This substantial tax liability incentivises the use of the 99-1 property arrangement to reduce the tax burden.
To circumvent this tax burden, the son would purchase the property first, avoiding the need to pay ABSD. Immediately afterward, he would sell 1% of the property to his father in a subsale. This arrangement allows Person B to pay ABSD only on the 1% share acquired, significantly reducing the tax burden. Specifically, he would pay 20% ABSD on the 1% share, which amounts to only $2,000.
Additionally, because the father now owns 1% of the property, they can leverage their CPF savings and secure a bank loan against the property, alleviating financial constraints. With the father’s 1% ownership, he can utilize his Ordinary Account CPF to finance the property and obtain a bank loan with a Loan-to-Value (LTV) ratio of up to 75%, equating to $750,000.
This strategy benefits both parties by facilitating property acquisition while minimizing tax liabilities and financial obstacles. Consequently, the Inland Revenue Authority of Singapore (IRAS) has been cracking down on this loophole to prevent what they view as tax evasion, given that both parties can otherwise jointly purchase the property without resorting to such measures.
What is Decoupling and why is this the better alternative?
Let’s move on to a method called decoupling. While I cannot guarantee that the government will not scrutinize this approach in the future, I believe there are no ethical concerns with this choice. As of April 2015, the government halted the decoupling of Housing and Development Board (HDB) flats. However, there has been no indication from the Inland Revenue Authority of Singapore (IRAS) of any crackdown on ABSD associated with private property decoupling since. Based on this, it seems that decoupling for private properties remains lawful, using HDB decoupling as a precedent. If it were considered illegal, IRAS would likely have pursued similar cases, as they did nine years ago with HDB decoupling. Therefore, I argue that decoupling remains a legitimate option for private property transactions.
So, what is decoupling? Decoupling typically involves a married couple who jointly own one property, their matrimonial home. One spouse sells their stake in the property to the other, allowing that spouse to own it outright. The spouse who no longer has property ownership can then purchase their own property without incurring Additional Buyer’s Stamp Duty (ABSD), as it would be their first property under their name. This results in one spouse owning one property while the other owns two. The crucial distinction lies in the ABSD payment: the spouse who acquires the second property pays only a fraction of what they would have paid if they jointly owned both properties. For instance, in this scenario, Party A owns only one property and does not pay additional ABSD, while Party B owns two properties but pays significantly less ABSD—perhaps only $2,200 instead of $200,000. Thus, decoupling presents a significant advantage in terms of ABSD savings and property ownership.
What are other potential loopholes that are not closed & I expect IRAS to go after?
When clients inquire about potential loopholes, I approach the topic with caution. Instead of suggesting ways to exploit these loopholes, I prefer to inform clients about the associated risks and areas where they should exercise caution. I emphasize the importance of vigilance and the potential for future government intervention. My goal is to ensure clients make informed decisions and mitigate any legal or regulatory risks.
Currently, there are two potential loopholes worth discussing. The first involves purchasing commercial or industrial property under a company name to avoid the 9% Goods and Services Tax (GST). This tactic involves quickly setting up a company through the Accounting and Corporate Regulatory Authority (ACRA), purchasing the property under the company’s name, and subsequently claiming back the 9% GST. Although this practice is currently legal, recent governmental actions targeting other loopholes, such as trusts and the 99-1 strategy, suggest possible future crackdowns. I advise clients to proceed cautiously and recommend acquiring property under a company name only if the company has a demonstrated history of profitability and operation. Creating a company solely to evade GST is considered tax evasion and should be avoided to mitigate potential legal ramifications.
The second loophole involves engaging in sham marriages to transfer 99% ownership of a property to a foreign spouse, thereby avoiding the 60% ABSD. This illicit practice exploits the system and violates Singaporean law. In these cases, a foreigner marries a local under false pretenses to claim the property as their first matrimonial home and evade ABSD. However, such schemes are subject to government scrutiny and are likely to result in severe penalties if discovered. I strongly caution clients against participating in sham marriages or similar fraudulent activities to circumvent ABSD, as the government is vigilant in enforcing laws and regulations to maintain integrity in property transactions.
Navigating Real Estate Investments: Balancing Strategy and Loopholes
Navigating the realm of real estate investing requires a keen understanding of various strategies, potential loopholes, and associated risks. While avenues like decoupling offer legitimate means to optimize property ownership and taxation, others, such as exploiting loopholes to evade taxes, carry significant legal and ethical risks.
As an advisor, my role is to educate clients about these complexities, empowering them to make informed decisions while emphasizing ethical conduct and compliance with regulations. By remaining vigilant, cautious, and proactive, investors can navigate the landscape of real estate investing with confidence and integrity, ensuring long-term success and sustainability in their endeavors.
Check out 6 different methods on how to legally avoid ABSD for a second property.