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Ruling

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

Question:

Will the supply of the property by you as mortgagee in possession, be a taxable supply and thus, subject to GST?

Answer:

No, the supply of the property by you as mortgagee in possession will not be a taxable supply. As such, you will not be liable for GST on the supply.

Relevant facts and circumstances

You are the mortgagee in possession of the property.

The owners of the property are the mortgagors and they granted you a mortgage over the property.

You issued a default notice under the mortgage pursuant to the relevant legislation to the mortgagors and then you entered into possession of the property.

You have advised that the house was on the property at the time of the original purchase and was occupied by the mortgagors as their family home. While the house is not currently occupied it is still capable of being occupied as a residence.

A valuer who inspected the property, advised you that until recently the property was used partly as residential premises and partly for the operation of a commercial enterprise.

You are currently marketing the property for sale via a real estate agent and, when an acceptable offer is received for the property, will enter into a contract of sale as mortgagee for the mortgagors exercising its power of sale pursuant to the mortgage.

As yet, there is no purchaser but you have supplied to the ATO a draft contract of sale which it intends to use for the sale.

The contract indicates that the price is exclusive of GST.

The mortgagors were requested to provide a notice as to whether they believe the sale of the property is a taxable supply. No response was initially received but the mortgagors have now supplied a notice which states that the sale of the property 'would not be a taxable supply' and provided reasons for this view.

However, a letter accompanying the notice states a contrary view.

The www.business.gov.au website states that the mortgagors are not currently registered for GST.

Relevant legislative provisions

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

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

A New Tax System (Goods and Services Tax) Act 1999 Division 105

A New Tax System (Goods and Services Tax) Act 1999 Subsection 105-5(1)

A New Tax System (Goods and Services Tax) Act 1999 Subsection 105-5(3)

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 105-5(3)(a)

A New Tax System (Goods and Services Tax) Act 1999 Section 188-10

A New Tax System (Goods and Services Tax) Act 1999 Subsection 188-20(1)

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

Reasons for decision

Summary

The sale of the property is not a taxable supply because the mortgagors are not registered or required to be registered for GST.

Consequently, your supply of the property as mortgagee in possession will also not be a taxable supply. As such, you will not be liable for GST on the supply of the property.

Detailed reasoning

Section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that an entity must pay GST on any taxable supply that it makes.

Of relevance to this case is Division 105 of the GST Act which provides that a creditor is liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor. It does not matter whether the creditor is registered or required to be registered for GST or whether the supply is in the course or furtherance of an enterprise the creditor carries on.

In particular, subsection 105-5(1) of the GST Act states:

(1) You make a taxable supply if:

· 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

· had the debtor made the supply, the supply would have been a *taxable supply.

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

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

(3) However, the supply is not a *taxable supply if:

· 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

· 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.

In this case, you are the mortgagee in possession of the property currently owned by the mortgagors. You are in the process of selling the property in satisfaction of a debt that the debtors owe to you.

As per paragraph 105-5(3)(a) of the GST Act, the mortgagors have given you a written notice stating that the sale of the property 'would not be a taxable supply' if they made the sale. The mortgagors also provided reasons as to why they consider the sale would not be a taxable supply. However, the information on this notice is different to the information supplied by the mortgagors in a letter accompanying this notice.

Therefore, even though you have received a notice from the mortgagors that complies with paragraph 105-5(3)(a) of the GST Act, in view of the other information supplied by the mortgagors, it is considered appropriate to determine if the sale of the property would be a taxable supply if it was made by the mortgagors.

For a sale to be a taxable supply, all of the requirements of section 9-5 of the GST Act must be satisfied.

Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

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

· the supply is *connected with Australia; and

· 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.

In order to satisfy Division 105 of the GST Act, we need to consider whether the sale of the property would have met all of the requirements listed in section 9-5 of the GST Act if it was the mortgagors who were making the sale.

In this case, the www.business.gov.au website states that the mortgagors are not currently registered for GST. Therefore, as the mortgagors are not registered for GST it is necessary to determine if they are required to be registered for GST.

An entity is required to be registered for GST if:

· it is carrying on an enterprise, and

· its GST turnover meets the registration turnover threshold (currently $75,000 for entities other than non-profit bodies).

In determining whether an entity's GST turnover meets, or does not exceed, a turnover threshold, section 188-10 of the GST Act states:

(1) You have a GST turnover that meets a particular *turnover threshold if:

· your *current GST turnover is at or above the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is below the turnover threshold; or

· your projected GST turnover is at or above the turnover threshold.

(2) You have a GST turnover that does not exceed a particular *turnover threshold if:

· your *current GST turnover is at or below the turnover threshold, and the Commissioner is not satisfied that your *projected GST turnover is above the turnover threshold; or

· your projected GST turnover is at or below the turnover threshold.

Notwithstanding that an entity's current GST turnover (current month plus the previous 11 months) may be over $75,000, an entity will not meet or exceed the registration turnover threshold of $75,000 unless its projected GST turnover is above $75,000.

This means that, regardless of the mortgagors current GST turnover, the mortgagors will not be required to be registered for GST unless their projected GST turnover is over $75,000.

The term 'projected GST turnover' is defined in subsection 188-20(1) of the GST Act as:

(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:

· supplies that are *input taxed; or

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

· supplies that are not made in connection with an *enterprise that you *carry on.

However, section 188-25 of the GST Act modifies the operation of subsection 188-20(1) of the GST Act by excluding certain supplies when working out an entity's projected GST turnover. It states:

(1) In working out your *projected GST turnover, disregard:

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

· 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.

Goods and Services Tax Ruling GSTR 2001/7 provides guidance on the operation of section 188-25 of the GST Act. In particular, GSTR 2001/7 provides that the term 'capital asset' refers to the assets that make up the 'profit yielding subject' of an enterprise and includes those assets, such as land, that are held by an entity to produce income.

You advised that until recently the property was used partly as residential premises and partly for business.

It is clear from the activities previously conducted on the property that it is a capital asset and that when sold its transfer to a purchaser will be the disposal of a capital asset. As such, the proceeds from the sale of the property will be excluded from the calculation of the mortgagors' projected GST turnover under paragraph 188-25(a) of the GST Act.

In addition, you have not supplied any information that indicates that the mortgagors' projected GST turnover (excluding the sale of the property) will exceed $75,000. Therefore, it is reasonable to conclude that the mortgagors are not required to be registered for GST.

As all of the requirements of section 9-5 of the GST Act have not been satisfied, the sale of the Property, if made by the mortgagors, would not be a taxable supply.

Consequently, your supply of the property as mortgagee in possession will also not be a taxable supply. As such, you will not be liable for GST on the supply of the property.

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