Mother of all loop-holes to QC rule..?

By The Folks @PropTalk - December 13, 2014 9 Comments

The wife and I cannot quite comprehend the reason why the Government is allowing developers to sell units (and in one recent case, all the units in one particular completed project) to their parent or subsidiary companies in order to avoid paying the extension charges on the development's qualifying certificate.

For those who are wondering what we are talking about, the Residential Property Act dictates that developers with shareholders or directors who are not Singaporean must obtain a Qualifying Certificate (QC) for a new development. They then have two years after obtaining the temporary occupation permit (TOP) to sell all units. Failing to do so, extension charges are levied at 8% of the land price for the first year, 16% for the second and 24% for subsequent years.

The original intention of the QC rule (as we understand it) is to ensure that developers price their projects sensibly. Why the rule only applies to developers with foreign shareholders/directors remains a puzzle to us, but the wife and I shan't harp on this too much (protecting locals is always good, no?).  However, the exception does provide an "escape route" for developers facing QC datelines to avoid paying the charges by privatizing as a Singapore company.

What we have the biggest issue with is the "inter-company sale", which is effectively a transfer from the left to right hand. This, the wife and I believe, is a much bigger loop-hole and totally negates the very reason why the Government had implemented the QC rule in the first place.

Some may argue that the developer is already "penalized" as there are substantial costs involved for the Group when a developer sells part/all of the units within a completed condo project to their parent or subsidiary. Other than the purchase cost, the parent/subsidiary will also have to cough up the 15% additional buyers' stamp duty associated with such purchase.

So why do we say that these "inter-company sale" is a loop-hole (and a big one at that)?

1. The purchase cost is effectively just a "holding cost" within the Group. So for deep-pocket developers (which there are many, given the enormous profits they have made over the past few years), this represents a substantially "smaller pain" than having to slash prices to move units.

2. While it is true that the parent/subsidiary is liable to pay ABSD for buying units off the developer, there is nothing to stop the later from reducing the selling price to offset the ABSD payable... all in the name of "bulk purchase". And besides, the ABSD amount that's payable is comparatively small compared to the extension charge, especially if the said project has a large number of unsold units.

3. The wife and I are not 100% certain on this, but there may be avenues for the parent/subsidiary to resell the "purchased" units subsequently without having to pay the Seller's Stamp Duty (applicable for reselling of private homes within 4 years of purchase). So they get a heavily discounted price upon purchase and once the timing is right, are able to not only recoup their investment but also make a substantial profit - win-win for the Group.

If there is indeed genuine concerns about the continual runaway private home prices so much so that we are falling over ourselves trying to cool the property market, the wife and I wonder when the Government will eventually step in to plug this mother of all loop-holes...

Source: Calvin and Hobbes 

9 comments to ''Mother of all loop-holes to QC rule..?"

  1. The rule of foreign ownership is also strange. Technically this rule applies to all listed property developers (stocks can be owned by foreigners). I am not sure whats the logic behind that.

    - Kenny

    1. Hi Kenny:

      We do not understand the logic either. Hopefully one of our more learned reader (Or someone from MND) can explain things to us. :-)

  2. Im not sure how things are calculated by logically if there are many unsold units, wont the ABSD for a parent purchase be higher than the QC extension charges for just the land cost?

    - TD

    1. Hi TD,

      The wife and I reckon it all depends on how long the developer think they will need to sell all their remaining units.While we agree that coughing up the ABSD is probably a last-ditch effort, it may actually be a cheaper option than paying the extension charges - especially for projects that have a large number of unsold units.

      Remember that the extension charges, unlike the ABSD, is not a one-time payment. It goes up to 24% of the land price from the third year onward. And the wife and I are aware of projects (built prior to the QC days) that were not 100% sold even after 10 years of receiving their TOP.

      In the recent example of the developer who sold all 48 units in their project to its parent, they must have worked out the sum and figured that it was far better to pay the ABSD than continue to pay the extension charges.

  3. This is the logical move for developers. After selling to their parent or subsidiary, they can choose to rent out the units. Under QC rule, they are not allowed to rent.

    I think the rule of foreign ownership is to protect Singaporean interest. Don't want to have too many foreigners or foreign company holding on to Singapore property. Force them to sell. Other benefit is that when government land sale say there will be 20,000 condo units in the market, there will be 20,000 units. Maybe Far East manage to convince government to give advantage to Singapore developers.

    Just Saying

    1. I also think that the rationale is to prevent foreign interests in hoarding land, which I think the rule is designed with good intention. It perhaps should be more targetted. A rule with such a broad brush that affects listed LOCAL companies may end up getting different outcomes than was originally intended. Kenny.

    2. Hi Anonymous (Dec 17, 12:19AM):

      Yes, the wife and I do agree that it makes sense for developers to sell to their parent or subsidiary as not only can they now rent out the unsold units (which you have correctly pointed out), they also do not have to drop prices significantly to try and move units. But it does negate the purpose (one of the purposes anyway) of the QC rule, which is to ensure that developers price their units realistically enough to sell within the stipulated 2 years after TOP.

      Interesting you mentioned the benefit when comes to more "predictability" on the actual number of condo units built versus government's projection. But we reckon that even without the QC rule, developers these days will probably not buy a piece of land via GLS and sit on it for any prolonged period of time. And after they have acquired the piece of land, the decision on how many units to build still rest mainly with the developers.

  4. Developers or individuals technically cannot save on ABSD or SD by artificially selling at a "lower" price. Loop hole have been closed by IRAS in determining the calculation based on purchase price or market value, whichever is higher. The most developers can save is a couple of percentage down of the selling price, but not on a $1 value.

    1. The operative word being "technically". :-)

      Developer can probably justify giving their parent/subsidiary a 15% discount on the psf price for bulk purchase. Matter of fact, this has already been done before, if our memories served us right.