HOCK LOCK SIEW

A creative way of selling homes that is testing tax boundaries?

The Peak @ Cairnhill I and II comes with enhanced scheme offering longer exercise period and transferable option

Friday, March 24, 2017

by Lynette Khoo
[email protected]
@LynetteKhooBT


THE enhanced deferred payment scheme at The Peak @ Cairnhill I and II (Peak I and Peak II) offers an intriguing way for the developers to move their inventory, but it is worth asking if it goes against the spirit of stamp duties on residential transactions.

For a while now since the onset of property cooling measures, developers have tried various means to make their projects more palatable. They have more flexibility to come up with creative marketing schemes for delicensed projects - those that have received Certificate of Statutory Completion and individual strata titles issued to buyers.

Since the sales and purchase agreements for delicensed projects no longer come under the purview of the Controller of Housing, developers are able to stretch their imagination to the limits in dangling incentives for buyers under private treaties.

One commonly used scheme in delicensed projects thus far has been the deferred payment scheme, which allows buyers to defer the substantial balance payment for one to two years.

The scheme for Peak I and Peak II is touted as "enhanced" for reasons including stretching the exercise period for the option to purchase - which is three weeks in normal circumstances - to 18 months and two years respectively. This means that the buyers defer paying the stamp duties on purchase for 18 months at Peak I or two years at Peak II.

In addition to the longer exercise date, the buyer can also nominate someone else to exercise the option, thanks to a "and/or nominee" legal clause in the private treaty with the developer.

To be clear, flipping an uncompleted property by reselling the purchase option is not allowed under the Housing Developers rules. The option granted by the housing developer is not assignable or transferable. This means a home owner can only sub-sell the property after he has signed the sales and purchase agreement.

But for delicensed projects and resale properties, they are a different kettle of fish. There is usually less incentive for a third party to take over an option to purchase an already-completed unit since he can buy another completed unit directly in the resale market.

In private resale agreements, there can also be legitimate reasons for including the legal clause to give the buyer that flexibility of nominating someone else to exercise the option. For instance, a married couple may choose to decouple their existing property holdings before one of them exercises the option to purchase a new property.

But since the creative schemes at Peak I and Peak II allow the option exercise date to be 18 months to two years later, such long exercise period does make it highly probable for the first buyer to profit from reselling the option to someone else without paying relevant stamp duties.

Illustration

To give an illustration, let's say Buyer A agrees to buy a small unit at Peak II from the developer for S$2.1 million by footing a 20 per cent non-refundable downpayment of S$420,000. Buyer A can move into or rent out the unit as he has signed a tenancy agreement with the landlord as master lessee. During the two-year period, the property tax and maintenance fee payable are also absorbed by the developer.

Between now and the exercise date in March 2019, Buyer A finds Buyer B to take over the option; Buyer B agrees to be the nominee to exercise the option by paying Buyer A S$520,000 as he expects that the price of the unit will rise by more than S$100,000 in two years' time.

This is a win-win. Buyer A gets to profit on a "resale" without paying any buyer's stamp duty and seller's stamp duty since he did not effectively own the unit to begin with. Buyer B gets to maintain the loan quantum based on the original property value of S$2.1 million even if prices shoot up within the two years. Such transaction is undeclared since passing on the option to purchase merely requires a letter of nomination prepared by solicitors.

But it is worth considering if this goes against the spirit of existing stamp duties on residential transactions, even if it has not been the developers' intention to help such buyers dodge taxes.

In response to a BT query, a spokeswoman from the Inland Revenue Authority of Singapore said: "The scope and coverage of stamp duties are clearly spelt out in legislation; and IRAS will continue to enforce these rules, as well as monitor any new developments in the market."

Peak I and Peak II were originally jointly developed by Tee Land and TG Development in a 27-73 joint venture; last year, this JV was dissolved with Tee Land exchanging its entitlement in Peak II for TG's entitlement in Peak I.

Since the inception of the enhanced scheme this year, 11 of some 17 balance units at Peak I have been sold while 56 of the 60 units at Peak II have been sold. But it is unclear if any of these options have been reassigned to someone else, though some agents say that none has taken place.

Lippo Group has also introduced a similar "enhanced deferred payment scheme" for Marina Collection on Sentosa, but with a 30 per cent downpayment instead of 20 per cent. So far, two units have been sold under the scheme, according to agents.

With the exception of Peak I that comes under qualifying certificate (QC) conditions, the other above-mentioned projects are not constrained by QC conditions or the remission clawback on additional buyer's stamp duty (ABSD) to sell out within a certain period.

But evidently, the possibilities are aplenty under private treaties for delicensed projects, for which developers have found ways to revive schemes that have been abolished for uncompleted projects (the government disallowed deferred payment schemes for uncompleted projects since 2007). There are about 2,031 completed unsold units as of end-2016, out of the total 21,102 unsold private residential units. Deferred payment schemes are, however, not without risks for developers themselves. Besides straining their balance sheets, they may end up holding onto the unsold units and still incur the attendant charges under QC and ABSD if buyers choose to let the options lapse.

Urgency

But the strong response to OUE Twin Peaks' deferred payment scheme early last year has prompted other developers to do likewise for their projects. Wheelock Properties introduced a similar scheme at Ardmore Three last year; CapitaLand rolled out its own version of a deferred payment scheme, known as the stay-then-pay programme, at two mega projects, d'Leedon and The Interlace last year, and later on introduced it for Sky Habitat this year.

Developers that are faced with looming deadlines to sell out their projects under the conditions of QCs and ABSD have greater urgency to delicense their projects to have more flexibility to sell under private treaty, other than to apply steep discounts to move inventory. This urgency will become stronger now that the tax loophole which allows them to sell residential units in bulk through sale of shares in the holding entities has been plugged. Since March 11, the government introduced additional conveyance duties or ACD on such share transfers to mirror the stamp duties on direct residential transactions.

But for all intents and purposes, creative payment schemes are deemed inessential if developers have priced their projects realistically to begin with.

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