With the aim to curb short-term property speculation, the Hong Kong SAR Government has announced on 19 November 2010 the proposal to introduce, on top of the current ad valorem property transaction stamp duty, a new tax of Special Stamp Duty (“SSD”) on disposal of residential properties.

At this moment, a bill is tabled to the Legislative Council to amend the Stamp Duty Ordinance and a Bills Committee has been set up to study the amendment bill.  Although the amendment bill has not been passed, the amendment bill will have retrospective effect from 20 November 2010 once it is passed.

This article provides a brief introduction of SSD and raises a few of our concerns to this proposed new tax, which is of high importance to both vendors and purchasers in property transactions.

The Proposed SSD

Under the proposal, any residential property acquired on or after 20 November 2010, either by an individual or a company, and resold within 24 months will be subject to the proposed SSD.  Both the vendor and purchaser are jointly and severally liable for the SSD.

The SSD is calculated as a certain percentage of the stated consideration for the transaction or market value of the property (whichever is higher) at the following rates for different holding periods by the vendor before the transaction (i.e. the duration between the date of acquisition and date of disposal):

1.       15% if the holding period is 6 months or less;

2.       10% if the holding period is more than 6 months but for 12 months or less;

3.       5% if the holding period is more than 12 months but for 24 months or less.

No SSD will be payable if the holding period is more than 24 months.

The Proposed Exemptions

There are certain proposed exemptions to the payment of SSD:

1.       Nomination of a close relative to take up the assignment of a property under a sale and purchase agreement (“close relative” means parent, spouse or child);

2.       Sale or transfer of a property to close relatives;

3.       Sale or transfer of a property due to bankruptcy or involuntary winding up;

4.       Sale or transfer of a property between associated companies; and

5.       Sale or transfer of a property to Government.

Other Related Measures

Apart from the proposed introduction of SSD, the Government has also announced on 19 November 2010 that deferral of payment of ad valorem stamp duty, regardless of the property transaction values, will no longer be allowed.  All stamp duty payment, including the ad valorem stamp duty and the SSD, must be paid with 30 days of the execution of the Sale and Purchase Agreement. Late payment could result in a penalty up to 10 times the original stamp duty payable.

Meanwhile, the Hong Kong Monetary Authority and the Hong Kong Mortgage Corporation also introduced additional measures to reduce the permitted level of mortgage provided by banks and the Mortgage Insurance Programmes (MIP).

Our Concerns

1.       Duty to pay SSD

Under the current conveyancing practice, the Provisional Agreement for Sale and Purchase, which is legally binding, is often signed before both parties seek legal representation and it is a usual term that the stamp duty is borne by the purchaser solely.

Since the duty to pay SSD is imposed on both the vendor and the purchaser, the vendor and the purchaser will have to agree on whose duties to pay the SSD before the provisional agreement is signed.  The purchaser should ensure that the Provisional Sale and Purchase Agreement provides that the vendor pays the SSD and appropriate provisions should be inserted to ensure that the vendor fulfils his duty to pay the SSD.

2.       Additional SSD

If, as agreed between the parties, the SSD is paid by the vendor, in case the stated consideration for the transaction is considered as inadequate by the Inland Revenue Department (IRD), the IRD could impose additional SSD on both the purchaser and vendor.  As the vendor may no longer be able to be located after the transaction, the purchaser would have to bear the risk of paying the additional SSD notwithstanding the vendor has agreed to pay for the SSD under the Sale and Purchase Agreement.

3.       Cancelled Agreement

Since the SSD has to be paid within 30 days after the signing of the Sale and Purchase Agreement and deferred payment of stamp duty is not allowed anymore, if the agreement is cancelled before completion for whatever reasons, the parties to the agreement must still bear the statutory obligation to pay the SSD first before applying for refund.

Similarly, in a situation where a party defaults in paying the SSD which entitles the innocent party to rescind the contract, the innocent party would still have a statutory obligation to pay the SSD first before the innocent party could apply for refund.

In either case, it would lead to the undesirable situation that the parties may have to pay the SSD which is not within their budget or contemplation.

4.       Registration

Registration of the Sale and Purchase Agreement is of vital importance to property purchasers for priority and protection of their interests. As such, it is indeed the purchasers who are more concerned with the due payment of stamp duty.

However, in case the SSD is partially/wholly borne by the vendor and the vendor fails to pay the SSD, the purchaser would not be able to register the agreement to preserve his priority and protect his interest. The purchaser would then have no choice but to make up the payment of SSD or run the risk of losing priority of his interest in the property. This undesirable situation could be a trap for purchasers who are not aware of such risk.

Conclusion

The concerns mentioned above are not meant to be an exhaustive list.  The introduction of SSD is not simply an increase of tax rate but will undoubtedly have a huge impact on the unique property conveyancing practice in Hong Kong.  Yet the proposed amendment bill tabled to the Legislative Council is far from satisfactory and indeed leaves quite a few question marks.