Avoiding ABSD with sham deals can cause you to lose the properties

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SINGAPORE - The days of owning properties in disproportionate shares such as 99-to-1 to avoid taxes are over, because doing so can cause you to be in trouble with the taxman or, worse, lose the property in a dispute.

This essentially is the impact of a recent ground-breaking decision from Singapore’s highest court that emphasised that property investors who try to circumvent taxation law that governs real estate can expect to face both state penalties and financial losses.

The ruling will make property investors sit up because the Court of Appeal went as far as outlawing sham arrangements that are done in anticipation of tax gain, even when the investors have yet to go ahead with a transaction that has the effect of evading tax.

While such investors will not face tax penalties since they have not evaded any tax, they may still lose their properties if they get into a dispute because the courts will not help them to uphold a sham arrangement.

This is similar to the rules made by English courts, where “equity”, the legal principle that focuses on fairness and justice, will not help those who have tainted their transactions with “unclean hands”.

In making the landmark ruling for property cases here, three senior judges – Chief Justice Sundaresh Menon and judges of the Court of Appeal Steven Chong and Hri Kumar Nair – overturned an earlier decision of the High Court, which ruled in favour of an owner who bought a $1.9 million condominium unit in a 99-to-1 share with his then girlfriend.

When the couple broke up, the man, who held the 1 per cent share, wanted his rightful share because he paid for over 50 per cent of the property.

He admitted that he had retained only a minute share during the purchase because he wanted to save on taxes in a future “decoupling” – transferring the 1 per cent to the girlfriend – so that he can buy a fresh property as a non-owner who would not need to pay the additional buyer’s stamp duty (ABSD).

The High Court earlier found that there was no common intention for the couple to own the property in this manner because the main purpose of the 99-to-1 arrangement was to pay less tax.

As the couple had broken up before the “decoupling” and the man did not manage to buy another property, the court ruled that he was entitled to keep over 50 per cent of the property, based on the legal principle of “resulting trust” as a result of his financial contribution.

But when the former girlfriend appealed, the three judges in the Court of Appeal ruled that she could keep 99 per cent of the property. Based on the couple’s messages, they found that the man was “willing to demonstrate, at his own risk and expense” that she could hold the lion’s share of the apartment since he would never leave her.

Illegality tainted the claim

The judges did not stop at the finding on their relationship but went on to state that the man would have lost his claim on the property anyway because he had “tainted the resulting trust” that would uphold his stake as he had used a sham arrangement to pay less stamp duty.

“Recognising a resulting trust would effectively be endorsing that intention, and it is no answer to say that no ABSD was in fact evaded or that the parties will no longer pursue that intention,” said Justice Nair, who delivered the court’s ruling.

He noted that the High Court had ruled in the man’s favour earlier because it was seemingly unfair to deny the man’s claim, just because he intended to pay less stamp duty for the transfer of his small share.

But Justice Nair said the bigger misdeed was his intention to evade the ABSD for the second property because the man never intended to give up his stake in the first property.

“In our view, where the illegal purpose in question involves dishonesty, it would be extremely rare that the financial consequences of denying a claim would outweigh the gravity of the illegality,” Justice Nair said.

The court left no ambiguity in its decision as it reiterated the seriousness of using sham arrangements to circumvent the ABSD regime at least five times in its ruling.

Such attempts, if left unchecked, could undermine the purpose of the ABSD regime, which is to moderate demand in residential properties and promote a stable and sustainable property market.

Justice Nair said: “In our view, the nature and gravity of the contemplated illegality was serious. Tax evasion involves deliberate and fraudulent concealment of information and is a serious criminal offence.”

Even if the court did not find that the couple had a common intention to own the property in a 99-to-1 ratio, it would have denied the man’s claim based on the issue of illegality alone, he said.

How property investors can run afoul of the law

In view of the impact of the ruling, the court also provided two scenarios of how buyers could be taken to task by the taxman.

1. Decoupling. The co-owners purchase the first property in a 99:1 ratio but, in reality, they intended to own the property equally or in other shares. When the co-owners decouple this property, the one holding the smaller share would transfer the 1 per cent share to the other owner.

In doing so, stamp duty is levied on only that 1 per cent share. In this scenario, if the 1 per cent owner knows that he actually owns a bigger share of the property than the declared share, he could be committing the offence of under-stamping, by paying less tax for the transfer of the small share.

2. Evading ABSD. In this scenario, the co-owners decouple so that the one who no longer owns any share after the transfer can proceed to buy a second property. As this owner no longer holds any share in the first property, he can then buy the second property without paying the ABSD.

In this case, the law will come after the owner if this owner still retains an interest in the first property based on their own arrangement. If he proceeds to buy the second property despite having a beneficial ownership of the first property, he would have committed the offence of evading ABSD, by falsely representing to the authorities that he does not have any interest in the first property.

If such offenders are prosecuted for evading stamp duty, they can be fined up to $10,000 and jailed for up to three years.

In addition to these penalties, the Inland Revenue Authority of Singapore (IRAS) can also recover the rightful duty, plus a 50 per cent surcharge or a penalty up to four times the payable duty, depending on the facts and circumstances of the case.

Justice Nair noted that even if IRAS has the legal mechanism to claw back any taxes that have been evaded, errant investors cannot use the payment of such penalties as a mitigating factor to support their claims on their properties.

“Allowing (such) resulting trust claim would amount to condoning an illegal purpose which, in the present case, would undermine the ABSD regime,” he added.

So the important lesson from this case is simply this – if you make use of a sham arrangement to invest in properties by circumventing the law, you can risk losing a lot more because you cannot expect the law to help you in any way.