I. Introduction

Parents use various methods of providing for their children. One method is the creation of a trust over a property for the child’s benefit. In the Singapore context, the downside is if the couple already owns a property or properties, full payment for the property has to be made, because banks will not be allowed to disburse a loan to finance such an acquisition. However, by creating a trust for the benefit of the child, it is also possible that heavy Additional Buyer’s Stamp Duty (ABSD) will be imposed on parents who are purchasing a second or third property or more. This has become a relatively common practice after the introduction of ABSD in Singapore. But what happens if one parent later argues that the trust was a sham, and that he is the rightful owner to at least half of the trust asset? Who is really the rightful owner in such a situation? Siraj Ansari bin Mohamed Shariff v Juliana bte Bahadin and another [2022] SGHC 186 (Siraj Ansari) is one such case where the Singapore High Court found that the trust was not a sham.

Dentons Rodyk & Davidson LLP successfully represented the defendants.

II. Parties’ Arguments

In Siraj Ansari, the plaintiff (the husband) and 1^st defendant (the wife) were a married couple. They had two sons, the 2^nd defendant being the eldest son. The couple executed a Deed of Trust (Trust Deed) as settlors. Under this Trust Deed, the couple would be trustees for S$1.5 million condominium (Trust Property) purchased in favour of the 2^nd defendant, who was a minor at the time.

Approximately 20 years into the marital relationship, the marriage broke down. The 1^st defendant left the matrimonial home with the two sons, and subsequently filed for divorce in the Syariah Court.

The plaintiff commenced proceedings in the High Court, claiming that the Trust Property belonged to him and his wife. He argued that the Trust Deed should be set aside on the grounds of misrepresentation (by the 1^st defendant); mistake; 1^st defendant’s exercise of undue influence; and the 1^st defendant’s unconscionable conduct and/or that the Trust Deed was an unconscionable transaction. In other words, he submitted that he was deceived and/or unduly pressured by the 1^st defendant into entering into the Trust Deed. In doing so he claimed that he did not realise that the Trust Property would belong solely to his eldest son, although the full purchase price had been paid by the 1^st defendant and him through a re-mortgage of their existing semi-detached landed matrimonial home.

However, the plaintiff subsequently shifted his position during the trial and in his closing submissions, where his main argument was that the Trust Deed was a sham. He alleged that he and the 1^st defendant had only executed the Trust Deed for an illegal purpose; that is, to evade ABSD. The plaintiff argued that the flat was not the subject of any trust and should be included in the pool of matrimonial assets to be divided by the Syariah Court.

The defendants denied this and argued that the Trust Deed had been entered into for the bona fide purpose of providing for the 2^nd defendant. The defendants also counter-claimed for the plaintiff to be removed as a trustee.

III. Findings

The Court was of the view that the plaintiff’s case essentially turned on the question of whether the Trust Deed had been entered into for bona fide purposes. The Court applied the legal principles in determining whether a document is a sham as summarised in Chng Bee Kheng and another (executrixes and trustees of the estate of Fock Poh Kuan, deceased) v Chng Eng Chye [2013] 2 SLR 715 at [50] – [51]. The core inquiry was whether there was a common intention between the parties that the document in question is not to create the legal rights and obligations which it gives the appearance of creating. In the process, the Court might refer to a wider category of evidence, including the parties’ subsequent conduct.

Having considered all of the evidence put forward by the parties, the Court found that the Trust Deed had been executed for the bona fide purpose of providing for the 2^nd defendant. The Court based its judgment on several grounds.

First, the plaintiff and 1^st defendant had executed several documents in their capacity as trustees for the 2^nd defendant that affirmed the legitimacy of the Trust Deed. This included the declaration form that had been submitted to IRAS, confirming that the property was being purchased under a trust and that no ABSD was payable.

Second, the evidence given by the property agent and the solicitor that had assisted in the drafting and execution of the Trust Deed were consistent with the Trust Deed being a bona fide instrument. In particular, the cash flow chart prepared by the property agent reflected ABSD as nil, and the property agent also confirmed that he was informed by the plaintiff and the 1^st defendant that the Trust Property was being purchased for their eldest son under a trust. Further, it was common ground between the plaintiff and 1^st defendant that they had searched for and ultimately purchased a property to ensure that there would be sufficient funds to meet the needs of the 2^nd defendant, such as the cost of his university education, as and when they arose.

Third, the plaintiff’s own conduct prior to commencing this action was also generally consistent with the terms of the Trust Deed and the belief that this was a bona fide instrument – he never asserted that the Trust Deed was the sham until the eve of and during the trial. The Court also found that the plaintiff was not a credible witness. The plaintiff had originally stated in his pleadings as well as assert in examination-in-chief that the applicable ABSD rate was 12% of the purchase price of the property (i.e., S$178,800 based on the purchase price of the Trust Property). However, it emerged during trial that the prevailing ABSD rate at the time the Trust Property was purchased was in fact 7% (i.e., only S$104,300 would be payable as ABSD). The plaintiff made no attempt to clarify why he had thought that 12% was applicable nor what his true position was.

Prior to the commencement of this action, the plaintiff had also sent letters through his previous solicitors to the 1^st defendant to demand half of the rental proceeds from the Trust Property on the premise that the Trust Deed was bona fide.

In summary, the Trust Deed was not a sham instrument. Having directly put his interest in conflict with the interests of the beneficiary, the plaintiff was ordered to be removed as trustee.

IV. Key Takeaways 

This case provides a good illustration of how the Court will determine the intention of parties at the point of executing the Trust Deed. Just because a settlor or trustee has become disinterested in upholding the trust instrument in favour of the beneficiary does not mean that he or she can go back on their original intention. Indeed, with the introduction of ABSD to Singapore, and at high rates, it is common for people who already own property to set up a trust to purchase further properties on behalf of their children. By doing so, they avoid having to pay ABSD because their children do not own any existing properties. However, of course, such trusts must be genuine, meaning that the parents should be setting up the trust for the benefit of the beneficiary, i.e., their child, and not for themselves. The child will be recognised as the owner of the property, not the parents, and would have every right to control the property upon reaching the age of majority.

If a settlor executes a trust instrument for the sole purpose of avoiding ABSD, with no intention to actually give the property to the beneficiary, then it would be considered a sham trust and the person would be committing tax evasion. This is a criminal offence, and the settlor may face potential penalties amounting to a fine or imprisonment term or both.

Persons who wish to set up trusts in favour of their children should also bear in mind the recent introduction of the ABSD rules requiring any transfer of property into a trust to be subject to an ABSD (Trust) rate of 35% (ABSD (Trust)). This has to be paid up-front. Remission of this ABSD (Trust) may thereafter be provided through an application to IRAS, depending on the applicable ABSD rate on the beneficiary in question.

In Siraj Ansari, even though the plaintiff attempted to argue that the trust was a sham, the Trust Deed was found to be a genuine attempt by the parents to provide their child with a property that could be used by the child in the future to meet his needs such as an overseas university education. If this was not the case, though, then the consequences would have been dire – the settlors could possibly have faced a penalty of up to four (4) times the stamp duty payable, and could be sentenced to jail.