Edited version of private ruling

Authorisation Number: 1011492683443

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Ruling

Subject: GST and sale of property by a creditor

Questions:

1. Is the sale of a property by you, as a creditor, subject to Goods and Services Tax (GST)?

2. If so, can the margin scheme be used to calculate the GST payable?

Answers:

1. Yes, the sale of a property by you, as a creditor, is a taxable supply and subject to GST.

2. You may choose to apply the margin scheme to calculate the GST payable on the sale, provided you satisfy all the requirements for the application of margin scheme contained in section 75-5 A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant facts and circumstances

· You made a loan in 1995 to a company (the debtor).

· A mortgage was secured over a property.

· The property was a vacant block of land.

· No enterprise was operated on the property and no improvements had been made to it

· The debtor has recently changed its name.

· The debtor defaulted on the loan and you sold the property in part satisfaction of the debt.

· Your search on the Australian Business Register (ABR) found an Australian Business Number (ABN) for a trust, but no record was located for the company.

· The ABR records show that the company as the trading name of the Trust.

· The Trust has been registered for GST since 1 July 2000.

· You have no evidence to suggest that the land was owned on trust or that the debtor was operating as a trustee for the trust.

· Your attempts to obtain relevant information from the debtor were not successful.

· You have reviewed the information in your possession and conclude that:

o the debtor is not registered or required to be registered;

o the land was not used as a part of an enterprise;

o the land has no improvements;

o the debtor was acting in its own capacity as a company when it entered into the original loan agreement.

· The debtor has not given you any written notice stating that the supply would not be a taxable supply had the debtor made the supply.

· You have supplied a copy of the mortgage agreement and the contract of sale.

· In a recent telephone conversation with a member of this office your representative agreed that you are unable to confirm if the debtor held the property on its own right (or on any other capacity).

Reasons for decision

Question 1

Division 105 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with supplies made by creditors of property belonging to a debtor, where the supply is in satisfaction of a debt owed to the creditor.

Subsection 105-5(1) of the GST Act states:

You make a taxable supply if:

a) you supply the property of another entity (the debtor) to a third entity in or towards the satisfaction of a debt that the debtor owes to you, and

b) had the debtor made the supply, the supply would have been *taxable supply.

Subsection 105-5(3) of the GST Act states:

However, the supply is not a *taxable supply if;

a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply; or

b) if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

(*denotes a term defined in section 195-1 of the GST Act)

Division 105 of the GST Act contemplates a notional supply by the debtor as there is no supply in fact made by the debtor. The notional transaction can only be analysed and effect given to the intent of the legislation by treating the supply as if it were made by the debtor in the same circumstances as the supply contemplated and actually made by the creditor.

Accordingly, under subsection 105-5(1) of the GST Act, the supply is a taxable supply if it would have been a taxable supply, had the debtor made that supply. The creditor is liable for any GST payable on the supply of the debtor's property.

In your case, you sold the debtor's property to a third party, towards satisfaction of part of a debt that the debtor owes to you. Where the property was held by the debtor as the trustee for the family trust, and had the debtor sold the property, the supply would have satisfied the requirements of section 9-5 of the GST Act. Hence, the supply would have been a taxable supply. Therefore, it is our view that the requirements of subsection 105-5(1) of the GST Act have been satisfied.

Under paragraph 105-5(3)(a) of the GST Act, the supply is not a taxable supply if the debtor gives written notice to the creditor, stating that the supply would not have been a taxable supply had the debtor made it. The notice must contain full reasons why the supply would not have been taxable. Alternatively, under paragraph 105-5(3)(b) of the GST Act, if the creditor cannot obtain such a notice, the creditor may reach a belief, on the basis of reasonable information, that the supply would not have been a taxable supply if the debtor were to make it.

In your case, you are unable to satisfy paragraph 105-5(3)(a) of the GST Act, as the debtor has not given you a written notice as required by that paragraph.

You contend that the supply by the debtor is not a taxable supply on the basis of information you have about the property and the information you have obtained from the ABR. You have advised that you were unable to obtain information from the debtor, which would have supported your above contention.

Your representative also indicated in his recent telephone conversation with this office, that with the available information you are unable to conclude that if the debtor were to make the supply, the supply would not be a taxable supply. As such, the requirements of paragraphs 105-5(3)(a) and 105(3)(b) of the GST Act are both not satisfied.

Consequently, the sale of the property by you is a taxable supply.

Question 2

Under section 75-5 of the GST Act, 'you' may choose to apply the margin scheme if 'you' make a taxable supply of real property by selling a freehold interest in land.

We have determined that, in accordance with the provisions of Division 105 of the GST Act, the supply of the property in this case is a taxable supply.

Having regard to the provisions of Division 105 of the GST Act, you as the creditor, are taken to be standing in the shoes of the debtor when you make the supply of the property.

As stated, the relevant property was originally purchased prior to the introduction of GST and as such a valuation of the property will be required to work out the margin. Therefore, if the debtor would have been eligible to apply the margin scheme in line with section 75-5 of the GST Act, then you may also choose to apply the margin scheme in respect of the sale of the property.

In order to apply the margin scheme in connection with the sale of the property, you must meet all of the requirements of section 75-5 of the GST Act, including entering into an agreement with the recipient. You may request for an extension of time to apply the margin scheme, once you have entered into an agreement with the recipient to apply the margin scheme (subsection 75-5(1A) of the GST Act).

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