June 1, 2012
The introduction of the Additional Buyer's Stamp Duty ("ABSD") on 7 December 2011 affects certain buyers ("affected buyers") of residential properties in Singapore, including real estate developers. Affected buyers have to pay ABSD at applicable rate of either 10% or 3% of purchase price or market value of the residential property (whichever is higher), on top of the usual buyer’s stamp duty ("BSD").
The group of affected buyers who pay ABSD at rate of 10% are the foreigners and non-individuals (including all corporate entities and developers-companies). The other group of affected buyers who pay ABSD at rate of 3% are the Singapore Permanent Residents who already own 1 or more residential properties, and the Singapore Citizens who already own 2 or more residential properties.
The Inland Revenue Authority of Singapore ("IRAS") issued an IRAS e-Tax Guide on ABSD on 7 December 2011 to elaborate the scope and application of ABSD. In response to feedback, IRAS published its Second and Third Edition of the ABSD e-Tax Guide on 12 January 2012 and 19 January 2012 respectively2.
1. Definition of a Residential Property
Since ABSD applies only to purchase of residential property, it is important to know what constitutes "residential property". Interestingly, neither the First nor the Second Edition of the ABSD e-Tax Guide stated any definition of "residential property". In the Third Edition of the ABSD e-Tax Guide, "residential property" is defined as "immovable property (or part thereof) which, under the Master Plan, may be used for solely residential purposes or for mixed purposes, one of which is residential". An identically worded definition of residential property ("e-Tax Guide definition") found its way on 8 December 2011 into the First Schedule of the Stamp Duties Act (Cap. 312), which lists the instruments chargeable with stamp duty.
If we apply the e-Tax Guide definition of "residential property", then an approved commercial use unit comprised within a mixed use development on land zoned part residential (for instance "Commercial and Residential") under the Master Plan may be considered as "residential property", thereby attracting ABSD liability upon its purchase. This suggested application of the e-Tax Guide definition is probably incorrect since it ignores the approved commercial use of the unit and relies on the part residential zoning of the land in the Master Plan.
The Written Statement of the Master Plan highlights that the zoning notations in the Master Plan reflect the permissible predominant use of land and that the competent authority may consider and approve uses which are ancillary, related or compatible with the stated permissible predominant use. The competent authority under the Planning Act or any other written law will approve the specific uses of buildings and premises which may differ from their respective land zoning notations in the Master Plan.
It is humbly suggested that IRAS should consider adopting in the ABSD e-Tax Guide (and in the First Schedule of the Stamp Duties Act), the twin limb definition of “residential property” found in Interpretation Section 2 of the Stamp Duties Act. Residential property is defined therein as:-
Any house, building or other premises or any part thereof which is permitted to be used under the Planning Act (Cap. 232) or any other written law as a dwelling house or which is lawfully so used; or
Any land zoned in the Master Plan for solely residential purposes or for mixed purposes, one of which shall be residential
If we apply this latter twin limb definition (“Interpretation Section definition”), the purchase of an approved commercial use unit in a mixed use development on land zoned part residential will not attract ABSD as such unit falls outside scope of part (a) of the Interpretation Section definition.
I should also highlight that there are mixed use developments comprising of approved residential units to be built on land zoned "Commercial" under the Master Plan. If we use the e-Tax Guide definition here, then the purchase of such approved residential unit comprised in a development on land zoned "Commercial" may not attract ABSD on basis of the pure commercial zoning! However, the purchase of such approved residential unit will attract ABSD if we adopt the Interpretation Section definition of "residential property" since it is approved for use as a dwelling house.
The Master Plan zoning under part (b) of the Interpretation Section definition should be considered only in cases where there is a purchase of vacant land. In other words, we should just focus on the approved use of the premises or the unit to be purchased to determine whether it is residential property attracting ABSD liability.
The next point is whether we should look at the Master Plan zoning of the land to determine whether there is ABSD liability for a purchase of the whole building on the same land. If we do so, a developer who purchases an existing approved industrial building may have to pay ABSD on the purchase if the Master Plan zoning of the land is residential, regardless of whether the developer intends to apply for a change of use to redevelop the existing building into a residential development. Since the developer will in any event need to pay development charge for such proposed change of use, this aforesaid position seems harsh, notwithstanding that the developer can apply for upfront remission of ABSD via signing of undertaking to complete and sell all residential units within 5 years from date of Contract, amongst other things.
It is humbly submitted that IRAS should ascertain objectively the intention of the purchaser of the whole building and premises on the land to see if there is intention to redevelop. If there is none, then IRAS should only consider the approved use of the building and premises and disregard the land zoning in the Master Plan.
In this regard, it is useful to consider the application of ABSD in a purchase of a shophouse which is essentially a mixed use building with residential component. As stated in paragraph 9.1 of the latest ABSD e-Tax Guide, for a mixed use building with residential component, ABSD is computed on the value of the residential component only, which may be determined by a professional valuer or adjudicated by IRAS. This means that we should look at the approved use of the premises or part thereof. Otherwise, ABSD may be payable on the whole of the purchase price of the shophouse (where land zoning is part residential) if we adopt the e-Tax Guide definition to determine whether there is ABSD payable.
2. Application of ABSD to Differential Premium for Extra Gross Floor Area
In Question 24 under the section of FAQs in the latest ABSD e-Tax Guide, it is stated, in response to a question on application of ABSD to differential premium for lease extension of a residential land, that ABSD applies on differential premium paid on residential land. It is also stated that ABSD remission does not apply to differential premium.
In my humble view, the premium payable on lease extension should be better described as lease extension premium. It is easy to understand the analogy of lease extension premium to purchase price for a leasehold estate in land. It is harder to appreciate the reason to disallow ABSD remission via undertaking in such situation.
In the minds of many real estate developers, differential premium is the premium or value payable to the land owner whether in the context of a proposed lifting of title restriction or in the context of extra gross floor area (“GFA”) made available whether for balcony use or for any other specified use. In government sales of leasehold residential lands, developers are entitled to an extra 10% of approved GFA for balcony use upon payment of differential premium. Unfortunately, there is nothing in the ABSD e-Tax Guide that deals with whether ABSD is payable on such differential premium, and if so, the conditions applicable.
I understand that IRAS may be working with the relevant authority to set out the applicable ABSD rules for the aforesaid differential premium. It is important to have these rules rolled out quickly so as to give clarity to the real estate developers who will need to plan and budget for such ABSD cost.
The Third Edition ABSD e-Tax Guide has provided important clarifications on the application of ABSD. However, it is hoped that more clarifications are forthcoming through the Fourth Edition of the said Guide so as to promote greater clarity on the application of ABSD as highlighted.
1This article was first published in The Business Times Weekend on 21 April 2012.
2A copy of the Third Edition of the E-Tax Guide can be downloaded at IRAS website: http://www.iras.gov.sg/irasHome/page.aspx?id=910
IRAS has issued the 4th edition of the IRAS e-Tax Guide on ABSD on 11 June 2012. For comments on this, please click here to refer to the article by Lee Liat Yeang "Clarifications On Ambit Of The Additional Buyer's Stamp Duty - The Saga Continues"