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Ruling

Subject: GST and sale of real property by a mortgagee in possession

Question 1

Can you apply the margin scheme in calculating the GST on the disposal of a specified property (the property)?

Answer

No.

Question 2

Is the amount required to be forwarded to the Australian Taxation Office (ATO) in payment of GST on completion of the sale 1/11 or the margin?

Answer

No. The amount required to be forwarded to the ATO is 1/11 of the consideration for the sale of the property.

Relevant facts and circumstances

You are a mortgagee in possession and exercising your power of sale of the property.

The mortgagor acquired the property as a vacant land from entity A.

You supplied a transfer document which shows that the consideration for the transfer of the property from entity A to the mortgagor was $X. The date of transfer is shown as a date after 1 July 2000.

The mortgagor borrowed some funds from you to complete the construction of the residential premises on the site. The mortgagor went into default and you took possession of the property.

When you took possession of the property in 200X/200Y, the premises were not completed. You completed the construction of the new residential premises and obtained occupancy permit from the relevant authorities.

You sold the property at auction for $Y. The contract for the sale of the property (contract) provides the contract date and that the completion is to take place within certain number of days after the contract date.

On the first page of the contract the line 'Margin scheme will be used in making the taxable supply' has the 'Yes' box ticked against it.

Initially you stated that the mortgagor had borrowed the funds to construct their own private residence on the site. However, you subsequently advised that the mortgagor had actually noted in their application for the initial loan that the property was for investment and not as advised earlier for their own home. You also stated that the mortgagor owned a number of properties and described themselves as a 'property developer'.

You stated that the mortgagor was previously registered for GST.

You further stated that in a specified month after 1 July 2000, GST did not apply to the property acquired pre July 2000. You also stated that as the property was acquired by the mortgagor in the specified month after 1 July 2000, it was not a taxable supply on which the GST was worked out applying the margin scheme.

You contacted the directors of entity A for information on the sale of the property to the mortgagor. The directors advised the following:

· They are the directors of entity A.

· Prior to 1 July 2000, entity A as trustee for entity B purchased the property as vacant land.

· To the best of their knowledge, entity A as trustee for entity B was not registered or required to be registered for GST.

· The trust did not carry on a business of dealing in land.

· They bought the land with the intention of building a holiday home on the site. The neighbouring property owner erected a building on the site quite detracting from the amenity and blocking the potential view from their property, accordingly, they decided to sell the property.

· They confirmed that the property was sold after 1 July 2000.

· They stated that according to the CGT disclosure in the trust's tax return, the sale transaction took place on a specified date after 1 July 2000, about a few weeks after the commencement of the GST legislation. They stated that this implies the exchange date of the contract was the specified date being after 1 July 2000 although the transfer document that you had supplied to them would indicate that the specified date was the settlement date.

· There is no copy of the contract of sale available.

· In relation to the margin scheme they stated that since the land was purchased prior to 1 July 2000, the vendor was entitled to have a value for margin scheme purposes as its market value at 1 July 2000. Given that the contract for sale was entered into only a few weeks after 1 July 2000 (or earlier) it is reasonable to assume that the sale price in the contract was equal to its market value at 30 June 2000. Accordingly there would have been no GST payable even if the supply was a taxable supply by application of the margin scheme.

· The mortgagor, entity A and entity B were not related entities.

The Australian Business Register shows that entity A as trustee for entity B (previous vendor) was registered for GST from 1 July 2000 for a number of years.

The property was never leased out prior to its sale.

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 Paragraph 40-65(2)(b).

A New Tax System (Goods and Services Tax) Act 1999 Section 40-75.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(1A).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(2).

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-5(3).

A New Tax System (Goods and Services Tax) Act 1999 Section 75-10.

A New Tax System (Goods and Services Tax) Act 1999 Subsection 75-10(2).

A New Tax System (Goods and Services Tax) Act 1999 Section 75-11.

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

Reasons for decision

Question 1

Summary

The sale of the property is a taxable supply. The supply is not eligible for the margin scheme. Therefore you cannot use the margin scheme in calculating the GST payable on the disposal of the property.

Detailed reasoning

Under section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) supplies by creditors in satisfaction of debts may be taxable supplies. 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).

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

In your case, the mortgagor has not provided you with a written notice that the supply would not be a taxable supply. Therefore, it is important to determine whether the sale of the property would have been a taxable supply had the mortgagor made the supply.

Section 9-5 of the GST Act defines what is a taxable supply. This section states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply is *connected with Australia; and

(d) you are *registered, or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

Based on the facts of this case, had the mortgagor made the supply the supply would have met all the requirements of section 9-5 of the GST Act for the following reasons:

· the sale would have been for consideration

· the sale would have been in the course or furtherance of the mortgagor's property development enterprise

· the supply is connected with Australia as the real property is situated in Australia

· even if the mortgagor was not actually registered for GST, the mortgagor would have been required to be registered for GST as his turnover would have met the registration turnover threshold of $75,000 - (this is because the sale of the property is a supply of new residential premises as defined in section 40-75 of the GST Act and therefore the value of the supply is included when working out the mortgagor's GST turnover for registration purposes)

· the sale of the property is not GST-free under any provision of the GST Act, and

· the sale is not input taxed as it is a sale of new residential premises as defined in section 40-75 of the GST Act, and therefore excluded from being an input taxed supply pursuant to paragraph 40-65(2)(b) of the GST Act which states:

(2) however, the sale is not input taxes to the extent that the *residential premises are:

(b) *new residential premise other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Accordingly, as the supply of the property would have been a taxable supply had it been made by the mortgagor, the sale of that property by you is a taxable supply pursuant to section 105-5 of the GST Act.

Margin scheme

Division 75 of the GST Act deals with the application of the margin scheme. Section 75-5 of the GST Act provides that you may use the margin scheme when selling real property if you and the purchaser agree in writing that the margin scheme is to apply.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made:

(a) on or before the making of the supply, or

(b) within such further period as the Commissioner allows.

However subsection 75-5(2) of the GST Act provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Subsection 75-5(3) of the GST Act sets out the situations where a supply is ineligible for the margin scheme. One situation where the margin scheme cannot be applied to a subsequent sale of real property is where the supplier acquired the property under a taxable supply on which the GST was worked out without applying the margin scheme.

You contacted the directors of entity A who advised that the previous vendor was not registered or required to be registered for GST.

The Australian Business register shows that, the previous vendor was registered for GST at the time of the sale of the property to the mortgagor.

In this case, there is no evidence that the contracts for the sale and acquisition of the property were exchanged before 1 July 2000. Additionally, according, to the directors of entity A, the exchange took place after 1 July 2000. However, even if the exchange incurred prior to 1 July 2000 the settlement took place after 1 July 2000 (16 August 2000).

Section 7 of the A New Tax System (Goods and Services Tax Transition) Act 1999 (GST Transition Act) provides that GST is only payable on a supply or importation to the extent that it is made on or after 1 July 2000. The general rules for determining whether a supply or importation is made on or after 1 July 2000 are to be found in section 6 of the GST Transition Act.

Under subsection 6(3) of the GST Transition Act, a supply or acquisition of real property is made when the property is made available to the recipient.

Where there is a sale of a freehold interest in land, the property will be made available when the freehold interest in the property is made available, that is, at the time of settlement of the sale contract. Therefore a GST liability may arise on the sale of a property when settlement occurs on or after 1 July 2000.

Accordingly, as the sale of the property was completed after 1 July 2000, the property was made available to the mortgagor after 1 July 2000. Therefore, the supply was subject to GST if the requirements of section 9-5 of the GST Act are met.

The previous vendor was registered for GST at the time of the sale (settlement of the contract of sale), the supply was for consideration, the supply was connected with Australia and we are not satisfied that the supply was not in the course or furtherance of an enterprise that the previous vendor carried on. Furthermore, the supply of the property was not an input taxed or a GST-free supply. Therefore the supply of the property by the previous vendor to the mortgagor was a taxable supply as the supply met all the requirements of section 9-5 of the GST Act.

There is no evidence that the GST on the supply of the property to the mortgagor was worked out using the margin scheme. Therefore, we are not satisfied that had the supply been made by the mortgagor the mortgagor would have been entitled to use the margin scheme.

Margin scheme and sale by mortgagee in possession

The ATO view in respect of whether a mortgagee in possession can use the margin scheme when selling a debtor's real property is expressed in issue 15.1.27 of the Property and Construction Industry Partnership - issues register - section 15 - sale of real property, which states:

15.1.27 Can a mortgagee in possession (a creditor) exercising power of sale in relation to real property apply the margin scheme in relation to the sale?

Non-interpretative - straight application of the law

ATO position

This question deals with the interaction between Division 75 - sale of freehold interest etc of the GST Act and Division 105 - supplies in satisfaction of debts of the GST Act.

If all of the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied, the mortgagee in possession (creditor) may apply the margin scheme in respect of the sale.

Division 105 of the 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. The supply is a taxable supply if it would have been a taxable supply had the debtor made the supply. The creditor is liable for any GST payable on the supply of the debtor's property.

Under Division 105, 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, 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.

It does not matter if the supply is made in the course of the creditor's enterprise, or if the creditor is registered, or required to be registered.

Having regard for the provisions of Division 105 of the GST Act, the creditor (which could either be a receiver manager, mortgagee in possession or a liquidator) is taken to be standing in the shoes of the debtor when the creditor makes the supply or is acting as agent for the debtor. As a result, for the purpose of the creditor applying the margin scheme to the sale, the word 'you' as used in Division 75 is taken to mean the debtor.

As stated above, the mortgagee in possession is taken to be standing in the shoes of the mortgagor when selling the mortgagor's property. Accordingly, a mortgagee in possession can only apply the margin scheme if the margin scheme would have been available to the debtor had the debtor made the supply.

In your case, as stated above there is no evidence to support that the margin scheme would have been available to the mortgagor had the mortgagor made the supply. Therefore, the sale of the property by you is ineligible for the margin scheme.

Question 2

Summary

The amount of GST on the supply is 1/11 of the sale price of the property.

Detailed reasoning

Section 9-70 of the GST Act provides that the amount of GST on a taxable supply is 10% of the value of the taxable supply.

Under subsection 9-75(1) of the GST Act, the value of a taxable supply is:

price x 10/11

where the price is the sum of:

(a) so far as the consideration for the supply is consideration expressed as an amount of money - the amount (without any discount for the amount of GST (if any) payable on the supply), and

(b) so far as the consideration is not consideration expressed as an amount of money - the GST inclusive market value of that consideration.

Accordingly, the amount of GST payable on the sale of the property is equal to 1/11 of the sale price of the property.

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