March 1, 2012
The introduction of the Additional Buyer's Stamp Duty ("ABSD") on 7 December 2011 affects all buyers of residential properties in Singapore, including real estate developers who buy land for redevelopment. Developers are entitled to remission of the ABSD on specific conditions. In response to queries and feedback, the Inland Revenue Authority of Singapore ("IRAS") published its Second and Third Edition of the ABSD E-Tax Guide on 12 January 2012 and 19 January 2012 respectively1.
Scope of the ABSD
Since ABSD applies only to the purchase of residential property, it is important to know what constitutes "residential property". In the Third Edition of the ABSD E-Tax Guide, "residential property" refers to "property which, under the Master Plan, may be used for solely residential purposes or for mixed purposes, one of which is residential". While most approved uses of lands will be consistent with their respective zoning, there are some lands in Singapore which have zoning that are different from their current approved use.
As such, a developer who purchases an existing industrial property in a specific location may be caught by the ABSD measures if the current Master Plan zoning of the land is wholly or partly residential. In other words, other than the approved use, the developer will have to look at the Master Plan zoning of the property to see if there is a residential component. The ABSD may apply regardless of whether the developer intends to apply for a change of use to redevelop the existing building into a residential development. This position seems harsh since the developer will in any event need to pay development charge for the proposed change of use.
Another anomaly in the application of this wide definition of "residential property" can be seen in buyers of office or retail units in a mixed use development zoned "Commercial and Residential". It cannot be correct to suggest that ABSD should apply to the purchase of such office or retail unit on the basis of the zoning of the land, following the wide definition of "residential property".
Remission of ABSD for development projects with four or less residential units
In the first edition of the ABSD E-Tax Guide, remission of ABSD was not allowed for development projects with four or less residential units. This position seems less favourable to such developers who are companies lawfully carrying on the business of property development and therefore not caught within the ambit of the sellers' stamp duty. The Second Edition has addressed this and remission of ABSD may now be allowed to such developers in such situations, on a case by case basis, subject to specific conditions imposed by IRAS including but not limited to the developer completing and selling all the units in the residential development within three years from the date of contract to purchase the land.
While IRAS seems to have acknowledged that smaller developments will require less time to complete and sell, IRAS may wish to consider allowing more time for all units in larger developments to be sold. A flat 5-year time period to complete and sell off all units in the development does not seem to be fair to a developer of a large development.
Development of projects comprising of two or more plots of lands
A developer may buy a second or more plots of lands ("second transaction") for amalgamation with its first purchase of land for development ("first transaction").
In cases where the first transaction is not subject to ABSD, remission on the second transaction may be considered on a case-by-case basis depending on the merits of each case, such as if the acquisition of the subsequent plot is contingent upon planning approval or if the subsequent plot acquired is incapable of independent development. This clarification should be welcomed by developers who might have entered into the first transaction before 7 December 2011 and who will need to purchase additional smaller plots of land post 7 December 2011 in order to enjoy the additional allowable GFA (gross floor area) in respect of the smaller plots of land which are often incapable of independent development, or if such acquisition is required in the planning permission.
Interest payable if developer breaches the undertaking provided for remission
Developers who qualify for remission have to give an undertaking to, amongst others, complete the development and sell all of the units in the development within five years from date of purchase (for development of more than four residential units). If the conditions are breached, ABSD (together with interest) becomes payable.
IRAS has now clarified that interest on the "claw-backed stamp duty" in case of breach of undertaking by a developer, is calculated at rate of 5% per annum commencing from 14 days after the date of acquisition of the site. However, this rate is subject to review and change by IRAS.
Development by related entity of the purchaser
It is common for developer companies to tender or purchase land using their holding or parent company ("first transaction") and subsequently appoint a related entity ("approved developer") to complete the purchase of the land and to undertake development of the project on the land. More specifically, this is referred to as a "Conveyance Direction" to the vendor of the land to transfer the land to the subsidiary. Upon such Conveyance Direction, the land is transferred to the related entity ("second transaction") and buyer's stamp duty is allowed to be remitted upon satisfaction of certain conditions.
It is now made clear that such first and second transactions will also qualify for remission of the ABSD, subject to the following conditions:
The approved developer shall meet the 2-year and 5-year conditions for ABSD remission purpose from date of first transaction.
There is intention at the onset for the Conveyance Direction to be made and that the Conveyance Direction is made within two months of the first transaction.
The holding company maintains a majority stake (more than 50% share/voting rights) in the approved developer from the date of the first transaction to the date of issuance of Temporary Occupation Permit or Certificate of Statutory Completion (whichever is earlier) of the development.
No consideration is paid for the second transaction by the approved developer to the holding company
Buyer's stamp duty has been paid on the first transaction.
It seems that the approved developer nominated by the holding company will have to sign the undertaking so as to enable the two companies to enjoy the remission of the ABSD.
Real estate developers should pay close attention to the conditions for the remission of the ABSD. If developers breach the conditions of undertaking including failing to complete and sell off all units within the undertaken time frame, they will have to pay the ABSD amount (based on land cost) plus interests. If any such developer is left with a few units, it should consider selling the said units to a related company at a lower ABSD cost based on the value or price of such remaining units.
The revised ABSD E-Tax Guide has provided important clarifications to the application of ABSD. However, it is expected that more clarifications will be needed upon further application of the ABSD measures in the months ahead.
1 A 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