Impact on Property Cooling Measures Adjustment

Property cooling measures were introduced in 2009 to contain a potential property market bubble and make residential housing affordable. Various tweaks and adjustments were made over the years and the Singapore government has recently made another round of adjustments to the TDSR and SSD which will take effect on 11th March 2017. Let us take a quick look on the various policy cooling measures.

Buyer’s Stamp Duty (BSD) and Additional Buyer’s Stamp Duty (ABSD)

  • Adjustments: No

Figure 1: BSD and ABSD ratesPCM1

Whether owned wholly, partially or jointly with others.

2 An Entity means a person who is not an individual. It includes the following:

  • An unincorporated association,
  • A trustee for a collective investment scheme when acting in that capacity,
  • A trustee-manager for a business trust when acting in that capacity
  • The partners of the partnership whether or not any of them is an individual, where the property conveyed, transferred or assigned is to be held as partnership property.

3 BSD and ABSD are to be rounded down to the nearest dollar

Source: www.iras.gov.sg

BSD is a payable tax for documents executed for the sale and purchase of property located in Singapore. A property is considered purchased when you exercise your option to purchase or when you execute the sales and purchase agreement. It is computed on the initial value (purchase price) as stated in the document, or the appraised value as assessed by a valuer, whichever is the higher amount.

ABSD is a tax payable on top of the normal Buyers Stamp Duty when you purchase or acquire a residential property in Singapore. The ABSD liability will depend on the profile of the buyer as at the date of purchase or acquisition of the property as shown in Figure 1. Similar to the BSD, it is computed on the initial value (purchase price) as stated in the document, or the appraised value as assessed by a valuer, whichever is the higher amount.

 

Loan To Value (LTV)

  • Adjustments: No

Figure 2: LTV ratesPCM2Source: www.mas.gov.sg

LTV refers to the maximum amount a bank will lend for the financing of a property purchase based on your property value. Buyers can borrow up to 80% for their first purchase or if they do not have any other existing housing loans in Singapore. For example, when the valuation of a property is $1,000,000, the maximum one can borrow is up to $800,000.

However, it is not guaranteed that one is able to get a loan at 80% or 60% LTV. The amount of housing loan you are offered depends on your personal income and financial commitments. With low personal income, you may only be able to obtain 50% financing even though you qualify for the 80% LTV benchmark.

Buyers dread the situation where the property’s appraised value does not match its initial value as lenders offer housing loans based on the lower valuation, and the borrower has to cover the difference. For example, if you purchased a property for $1,000,000 and the appraised value you get is $900,000. After applying the 80% LTV, it will result in a $720,000 instead of an $800,000 loan amount. In this case, the buyer will have to pay the difference of $80,000 ($800,000 less $720,000) in cash to cover the difference. This is one of the reasons why buyers forfeit their down payments when they are unable to obtain the 80% LTV.

 

Total Debt Servicing Ratio (TDSR)

  • Adjustments: Yes

TDSR is meant to prevent you from purchasing a property that is well beyond your financial means. It is also meant to curb property speculation so that Singapore does not experience a property market bubble. TDSR limits the amount of money banks or financial institutions can lend to you, which is 60% of your gross monthly income less all of your outstanding debts.

Examples of outstanding debts include:

  • Credit card balances (including “instalment plans” with retailers)
  • Student loans
  • Personal loans
  • Car loans
  • Other home loans (if applicable)

Furthermore, if you are a variable income earner, the TDSR framework requires you to take a 30% “haircut” on your average monthly income. Variable income items such as bonuses or allowances can also be factored in.

Another factor to take into account is the “stress test,” which is used to determine whether one can afford a rise in interest rates without going over the 60% TDSR limit. The stress test plays an important role in ensuring a property owner will be able to pay higher mortgage repayments when interest rates increase. Currently, the stress test interest rates are 3.5% for residential properties and 4.5% for commercial properties.

For HDB resale flats or ECs, the Mortgage Servicing Ratio (MSR) applies to the buyer along with the TDSR. The MSR limits the amount you can borrow on the purchase of an HDB or EC to 30% of your gross monthly income. If you have a gross monthly income of $10,000 a month and no monthly debt obligations, your monthly mortgage repayments will be capped at $3,000.

Figure 3.1: Fixed and Variable Income Comparison Example (Private Residential)PCM3Source: www.imoney.sg

From figure 3.1, if your gross monthly income is fixed at $10,000 and you have monthly debt obligations of S$2,500, your maximum TDSR limit will be S$3,500 ($6,000 minus $2,500). This implies that you can only afford a home loan with monthly repayments of up to $3,500.

If you have an average gross monthly variable income of $10,000, the TDSR requires you to take a 30% “haircut”. Therefore, you are only able to count $7,000 as your gross monthly income. With monthly debt obligations of $2,000, your maximum TDSR limit will drop to S$2,200 which means that you can only afford a home loan with monthly repayments of up to S$2,200.

Adjustments: There is no change to the 60% threshold, but it will no longer apply to Mortgage Equity Withdrawal Loans (MWLs) with LTV of 50% and below. MWLs are loans secured on the borrower’s equity in a residential property. The equity is the amount that the borrower has already paid on the housing loan for the purchase of the property, and the appreciation in the value of the property.

In simpler terms, these refer to loans which allow borrowers to use residential properties as collateral to get cash. This change will benefit asset-rich but cash-poor individuals.

Figure 3.2: Mortgage Equity Withdrawal Loans (MWLs) examplePCM4

Source: www.businesstimes.com.sg

From figure 3.2 example above, Mr Tan mortgaged his property worth $1,000,000 for a $700,000 MWL and has a $100,000 outstanding housing loan, leading to a total loan of $800,000 for the same property. In this case, the LTV is 80% ($800k / $1M), hence TDSR is applied on his current MWL. Once Mr Tan has repaid his MWL to $400,000 or below, the MWL amount is excluded from Mr Tan’s TDSR as the LTV has fallen to 50% and below [($400k+$100k)/$1M]. Kindly take note that only the $400,000 MWL will be excluded and TDSR is still applicable to Mr Tan’s $100,000 housing loan.

 

Seller’s Stamp Duty (SSD)

  • Adjustments: Yes

Figure 4: Existing and new Seller’s Stamp Duty (SSD) rates

PCM5Source: www.mof.gov.sg

SSD is a payable tax charged to property owners who sell their homes within a specified holding period. The SSD rate is tiered according to how long the property has been held before being sold.

Adjustments: As shown in figure 4, the SSD holding period will be reduced to three years from the initial of four years. This means that properties sold with a holding period of more than three years after purchase will not be liable for SSD. The SSD rates are also lowered by four percentage points for each tier.

 

Additional Conveyance Duties (ACD)

In addition to existing stamp duty on shares, ACD is a new stamp duty aimed at significant owners of equities interest in property-holding entities (PHEs) that can include partnerships, trusts and companies. It is used to plug a loophole in residential property transactions undertaken via transfer of shares in PHEs.

A PHE is a property-holding entity whose primary tangible assets (owned directly/indirectly) are Singapore residential properties. A PHE can be a Type 1 PHE, a Type 2 PHE or both.

Type 1 PHE means the target entity whose market value of the residential properties makes up at least 50% of the value of its total tangible assets (TTA).

Type 2 PHE means the target entity:

  • has 50% or more beneficial interest (directly or indirectly) in one or more entities (henceforth referred to as “related entities”) which is a Type 1 PHE; and
  • the sum of the market value of the residential properties beneficially owned by the target entity and its related entities is at least 50% of the TTA of the target entity and its related entities.

There are two types of ACD that will apply on qualifying transfer of equity interests in PHEs:

  • Additional Conveyance Duties for Buyers (ACDB):
  • Existing Buyer’s Stamp Duty at 1% to 3%
  • Additional Buyer’s Stamp Duty at 15% (flat rate)
  • Additional Conveyance Duties for Sellers (ACDS):
  • Seller’s Stamp Duty at 12% (flat rate)

Example on ACDB:

On 20 Mar 2017, Mr and Mrs Tan acquire 30% and 40% equity interest in Company A that directly owns a residential property valued at $8M. Company A’s total tangible assets is $10M.

STEP 1: Determine if the target is a PHE

  • Asset percentage = $8M/$10M = 80%
  • Company A is a Type 1 PHE as 80% of its total tangible assets is residential property.

STEP 2: Determine the buyers’ associates

  • Mr and Mrs Tan are associated as they are husband and wife.

STEP 3: Determine if the 50% significant ownership is met

  • Mr and Mrs Tan’s equity interest acquired will be added together as they are associated and together, they are significant owners since 30% + 40% cross the 50% significant ownership threshold.

STEP 4: Compute the ACDB payable

  • Mr Tan: ACDB x 30% x $8M
  • Mrs Tan: ACDB x 40% x $8M

Example on ACDS:

Mr Wong owns 80% equity interest in Company B, which owns 90% equity interest in Company A. Company A directly owns a residential property valued at $8M and its total tangible assets is $10M. Company B’s total tangible assets is $2M. Mr Wong had previously acquired 40% equity interest in Company B on 1 Jan 2011, 10% on 1 Apr 2017 and 30% on 1 Jan 2019.

Mr Wong sold his 80% equity interest in Company B on 1 Jan 2021.

STEP 1: Determine if the target is a PHE

  • Asset percentage for Company A = $8M/$10M = 80%
  • Company A is a Type 1 PHE as 80% of its total tangible assets is residential property.
  • Asset percentage for Company B = $8M x 90% / [$2M + ($10M x 90%)] = 65%
  • Company B is a Type 2 PHE as it owns 90% equity interest in Company A.

STEP 2: Determine the seller’s associates

  • Mr Wong is not associated to the other equity-holders in Company B. We will only look at the 80% equity interest belonging to Mr Wong.

STEP 3: Determine if the seller is a significant owner

  • Mr Wong is a significant owner as he owns 80% in Company B, which is above the 50% significant ownership threshold.

STEP 4: Compute the ACDS payable

  • Mr Wong: ACDS x 30%* x $8M x 90%

*ACDS does not apply to the other 50% equity interest as 40% was acquired before 11 Mar 2017 and 10% was acquired more than 3 years ago from the date of sale.

Source: www.iras.gov.sg

Kindly take note that the above examples are simplified versions. For more in-depth understanding and definitions on the ACD, please refer to the e-Tax guide released by IRAS as attached.

 

What to Expect

The adjustment made to the TDSR seems to benefit asset-rich but cash-poor buyers and would likely only promote property purchases by asset-rich individuals, while the adjustment made to the SSD benefits retirees who are looking to monetise their properties in their retirement years or cash-strapped property owners who are looking to cash out of their properties to tide over a difficult period.

Under the Qualifying Certificate (QC) regulation, developers have to sell all units within two years of obtaining the Temporary Occupation Permit, or to pay extension charges on the unsold units. If developers can’t sell all units in their project after 5 years, they have to pay ABSD on the remaining units. To avoid paying the extension charges or ABSD, developers are moving outstanding units through the transfer of shares. Hence, the implementation of ACD seeks to plug this loophole of residential property transactions undertaken via transfer of shares in PHEs.

The adjustments to the property cooling measures are unlikely to have a significant impact on the property market as it only benefits asset-rich individuals. ACD should still be bearable for large developers that are cash-rich and financially sound, but may not be true for smaller developers who are holding onto unsold units in projects that are fast approaching the deadlines. With the ACD in place, the only way out is price cutting to move unsold units off the shelves. Therefore, we can expect many good offers in the near future.


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