Word in the New$: Decoupling

by Ryan Ong

FINDING clever ways to save money and invest is not a bad thing. That’s how we beat Malaysia after we were kicked out. That same mentality is embodied in decoupling. When it was first explained at seminars, audience members would scream entrapment, sob, and start writing denial letters to the Inland Revenue Authority of Singapore (IRAS) in advance. Then it caught on that decoupling was actually legal, and it was all over the place until Housing and Development Board (HDB) put a stop to it this month:

What is this decoupling thing anyway?

Decoupling happens when a flat’s co-owner transfers full ownership of the unit to the other owner. The person doing the transfer is then no longer a property owner. This is important if you want to buy a second house.

At present, there is an Additional Buyer’s Stamp Duty (ABSD) of seven per cent, levied on Singaporeans who want to buy a  second property. Singaporean Permanent Residents pay 10 per cent ABSD for the second property. If you fully transfer ownership of your existing property to a spouse / family member, however, you don’t own property and buy without the added tax.

For example:

Say you and and your husband co-own a flat. After 30 years of hoarding cash, you have enough to purchase another property. That would be great to rent out, for retirement income and such.

Now if you attempt to purchase another property worth $600,000, you would actually have to pay $642,000. That’s due to the seven per cent ABSD.

So instead of paying the extra tax, you transfer full ownership of the property to your husband. True, that means he could sell it and pocket all the money, or make sole decisions about who lives in it, but what could possibly go wrong there?

Now, you are no longer a property owner. When you attempt to purchase the second property, there’s no ABSD levied on you.

That’s not the only benefit:

Decoupling was used for more access to CPF monies

There is a Minimum Sum (MS) that must be set aside in your CPF for retirement. At present, this is $161,000, or about the price of one bar snack at Marina Bay Sands, for most Singaporeans. If you want to buy your second property using CPF monies, you must be able to set aside at least half this amount ($80,500).

This was an added incentive to decoupling, as most Singaporeans use their CPF for housing. When you take out a property loan from the bank, 15 per cent of the down payment can come from your CPF, and just five per cent has to be in cash.

In the example of the $600,000 house, this would mean a down payment of $120,000 without CPF, versus a down payment of just $30,000 with CPF.

HDB puts an end to it, but totally not because of tax avoidance

On 1st April 2016, HDB revised regulations to prevent this particular form of decoupling.

Decoupling can still be done, but only for six specific reasons:

• Marriage
• Divorce
• Death of a co-owner
• Financial hardship (e.g. one co-owner can no longer make mortgage payments)
• Loss / renunciation of Singapore citizenship
• Medical reasons

The HDB spokesperson “stressed that HDB did not make the change to target the loophole that allowed buyers to avoid paying the ABSD, but as part of a regular policy review.” (see previous link)

Yeah, it’s just a coincidence that the regular policy review also prevented the loss of huge sums in avoided taxes.

At any rate, decoupling was an open secret in the property market, and has been ever since ABSD was imposed on the second house. If you Google it right now, you can see dozens of websites that still have details on how to do it (all obsolete now of course).

It’s probably a good thing

It will put a damper on some people’s investment plans. But it’s in keeping with the government’s attempts to lower housing prices; something that desperately needs doing after the crazy prices in 2012/13.

For those of you who want that second house, don’t lose hope. Member of Parliament Christopher De Souza has called for ABSD to be removed for Singaporeans. Maybe we’ll actually see this happen in the near future.

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Featured image Public housing (HDB): The River Vista at Kallang by Flickr user Jnzl’s Public Domain Photos. Public Domain Mark 1.0.

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The post Word in the New$: Decoupling appeared first on The Middle Ground.

- Ryan Ong