Edited version of private ruling

Authorisation Number: 1011518929713

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Ruling

Subject: GST and property

Question

Are you entitled, as mortgagee in possession, to make a decision to treat the sale of land as a non taxable supply if you have sufficient reason to believe it would have been a non taxable supply if the debtor had sold the land themselves, under section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer: Yes.

You are entitled, as mortgagee in possession, to make a decision to treat the sale of land as a non taxable supply if you have sufficient reason to believe it would have been a non taxable supply if the debtor had sold the land themselves, under section 105-5 of the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are the mortgagee exercising power of sale over a property.

The property is vacant land.

The registered proprietor (the debtor) is not registered for GST.

The debtor did not have a gross turnover of $75,000 within 12 months leading to the sale of the land contract date and has gone into liquidation.

You have sold the property and have a signed contract of sale.

The contract price of the property is an amount greater than $75,000.

The purchasers are now disputing your GST treatment of the sale and argue that GST is not applicable on the sale.

When the loan was provided to the debtor, the debtor stated that the use of the land was to be 'business and investment purposes'.

The loan provided to the debtor was a 'refinance loan' where very little information was provided by the debtor regarding their plans for the land other than 'long term investment'.

Settlement has been delayed pending resolution of the issue.

You are in possession of the general advice provided to the purchasers about this issue, from the ATO, which you have provided to us.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-40

A New Tax System (Goods and Services Tax) Act 1999 Section 23-15

A New Tax System (Goods and Services Tax) Act 1999 Section 105-5

A New Tax System (Goods and Services Tax) Act 1999 Section 188-20

A New Tax System (Goods and Services Tax) Act 1999 Section 188-25

Reasons for decision

Under section 9-40 of the GST Act, an entity must pay the GST on any taxable supply that it makes.

Division 105 of the GST Act is about supplies in satisfaction of debts.

Section 105-5 of the GST Act states:

Supplies by creditors in satisfaction of debts may be taxable supplies.

(1) 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 a taxable supply.

(2) It does not matter whether:

(a) you made the supply in the course or furtherance of an enterprise that you carry on; or

(b) you are registered, or required to be registered.

(3) 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.

(4) This section has effect despite section 9-5 (which is about what is a taxable supply).

Therefore, under Division 105 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 be taxable, or

· 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, as you do not have access to such a notice as described above, you are entitled, as mortgagee in possession, to make a decision to treat the sale of land as non taxable supply if you believe that you have sufficient reason to believe it would have been a non taxable supply if the debtor had sold the land themselves, under section 105-5 of the GST Act.

General additional information - capital assets and GST turnover

Section 9-5 of the GST Act states that a taxable supply is made if:

a) the supply is made for consideration

b) the supply is made in the course or furtherance of an enterprise that the entity carries on

c) the supply is connected with Australia; and

d) the entity is registered, or required to be registered.

However the supply would not be taxable if it was GST free or input taxed.

Ordinarily a supply by an entity that is not registered for GST would not be a taxable supply, unless the entity was required to be registered for GST. An entity is required to be registered for GST under section 23-5 of the GST Act if:

(a) it is carrying on an enterprise; and

(b) its GST turnover meets the registration turnover threshold.

Subsection 23-15(1) of the GST Act provides the registration turnover threshold as follows (for entities which are not non profit bodies):

(1) Your registration turnover threshold (unless you are a non profit body) is:

(a) $50,000; or

(b) such higher amount as the regulations specify.

Division 188 of the GST Act is about the meaning of GST turnover.

Subsection 188-20(1) of the GST Act states:

(1) Your projected GST turnover at a time during a particular month is the sum of the values of all the supplies that you have made, or are likely to make, during that month and the next 11 months, other than:

(a) supplies that are input taxed; or

(b) supplies that are not for consideration (and are not taxable supplies under section 72-5); or

(c) supplies that are not made in connection with an enterprise that you carry on.

Section 188-25 of the GST Act then modifies the operation of section 188-20 of the GST Act by excluding certain supplies when working out your projected GST turnover. It states:

In working out your projected GST turnover, disregard:

(a) any supply made, or likely to be made, by you by way of transfer or ownership of a capital asset of yours; and

(b) any supply made, or likely to be made, by you solely as a consequence of:

(i) ceasing to carry on an enterprise; or

(ii) substantially and permanently reducing the size or scale of an enterprise.

This means that your GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) of the GST Act. If you transfer ownership of a capital asset, it will be excluded from your projected GST turnover as indicated above.

Goods and Services Tax Ruling GSTR 2001/7 (GSTR 2001/7) is about the meaning of GST turnover including the effect of section 188-25 of the GST Act on projected GST turnover. Paragraphs 31 to 36 inclusive of GSTR 2001/7, discuss the meaning of capital assets as follows:

31. The GST Act does not define the term 'capital assets'. Generally, the term 'capital assets' refers to those assets that make up 'the profit yielding subject' of an enterprise. They are often referred to as 'structural assets' and may be described as 'the business entity, structure or organisation set up or established for the earning of profits'.

32. 'Capital assets' can include tangible assets such as your factory, shop or office, your land on which they stand, fixtures and fittings, plant, furniture, machinery and motor vehicles that are retained by you to produce income. 'Capital assets' can also include intangible assets, such as your goodwill.

33. Capital assets are 'radically different from assets which are turned over and bought and sold in the course of trading operations'. An asset which is acquired and used for resale in the course of carrying on an enterprise (for example, trading stock) is not a 'capital asset' for the purposes of paragraph 188-25(a).

34. 'Capital assets' are to be distinguished from 'revenue assets'. A 'revenue asset' is 'an asset whose realisation is inherent in, or incidental to, the carrying on of a business'.

35. If the means by which you derive income is through the disposal of an asset, the asset will be of a revenue nature rather than a capital asset even if such a disposal is an occasional or one-off transaction. Isolated transactions are discussed further at paragraphs 46 and 47.

36. Over the period that an asset is held by an entity, its character may change from capital to revenue or from revenue to capital. For the purposes of section 188-25 the character of an asset must be determined at the time of expected supply.

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