Edited version of your private ruling

Authorisation Number: 1012468393473

Ruling

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

Question

Is the supply of vacant land by the creditor as the mortgagee in possession, a taxable supply?

Answer

Please refer to the reasons for decision.

This ruling applies for the following periods:

Not applicable

The scheme commences on:

Not applicable

Relevant facts and circumstances

· You were registered for goods and services tax (GST) and your GST registration was cancelled in April 20YY.

· You were carrying on an enterprise of property development and built a number of new residential units, for sale.

· You purchased a property in 19MM, subdivided into a number of lots and built new residential units for sale.

· You advised us that your financial services provider (FSP) subdivided one of the lots into smaller lots and sold them at an auction in December 20ZZ as mortgagee in possession.

· You advised us that you were not carrying on your enterprise of property development when FSP subdivided the land and sold.

· The FSP is registered for GST.

· The titles of the land sold were in your name at the time of the settlement and you confirmed that these lots were not used in carrying on your enterprise of property development.

· The above lots of land were mortgaged to the FSP in relation to the finance obtained by you for the property development activities.

· According to the statement of accounts issued by the FSP the above lots of land were sold as taxable supplies and GST has been included in the sale price.

· The settlement statements provided by you in relation to the sale of the above lots of land do not indicate that the GST was included in the sale price or in the amount settled.

· You did not provide the sale contracts for the above lots of land.

· You confirmed to us that you did not inform the FSP that you were no longer carrying on an enterprise and your GST registration was cancelled prior to the settlement of the above properties.

· You believed that the FSP was aware of your financial situation and that you were not carrying on an enterprise and your GST registration was cancelled at the time of settlement of the properties.

· You now wanted to know whether the FSP had correctly included GST in the sale price when you are not carrying on an enterprise and your GST registration has been cancelled.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - section105-5

A New Tax System (Goods and Services Tax) Act 1999 - subsection105-5(1),(2) &(3)

Reasons for decision

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.

Under section 105-5 of the GST Act supplies made by creditors in satisfaction of debts may be taxable supplies.

Subsection 105-5(1) and (2) of the GST Act state:

(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.

In this case, the FSP had made the supply of the land to a third party (the purchasers of the properties) towards the satisfaction of the debt you owe to the FSP. However, it should be determined that if you had made the supply to the third party, whether the supply would have been a taxable supply to satisfy subsection 105-5(1) of the GST Act.

You were carrying on an enterprise of property development and your GST registration was cancelled in April 20YY as you considered that you were no longer carrying on the property development activities. You believed that based on the information provided to us you are not required to be registered for GST when the properties were settled as you have been receiving pension since 20XX. Therefore, it is considered that the supply of the properties would not have been taxable supplies if you were to make those supplies to the third parties in December 20ZZ.

Subsection 105-5(2) of the GST Act is not relevant in this case as the FSP made the supply in the course of their enterprise as financial services providers and they are registered for GST.

However, subsection 105-5(3) of the GST Act should be satisfied to consider whether the supply of the properties were not taxable supplies. A supply is not a taxable supply if:

(a) the debtor has given you (the creditor) 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.

Division 105 of the GST Act makes the creditor liable for GST on supplies of debtor's properties where the supply is in satisfaction of a debt owed by the debtor. It presupposes that a creditor, while standing in the shoes of a vendor, does not know every nuance of the debtor's activities; to this extent that section allows for specific input from the debtor in order to clarify the status of the supply.

The Commissioner's interpretation of the creditor's role in assessing a transaction is contained in Goods and Services Tax Ruling: GSTR 2002/5 at paragraph 211.

211. Before a creditor can treat a supply as not taxable under Division 105, it is necessary that the requirements of subsection 105-5(3) are satisfied. This may be achieved by either the debtor giving the creditor a written notice stating 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 the creditor cannot obtain such a notice, the creditor believes on the basis of reasonable information that the supply would be a taxable supply if the debtor were to make it.

This view gives the creditor some relief from delving too deeply into the debtor's activities at the time a supply under Division 105 of the GST Act is to be made. It suggests that the creditor takes a cautious approach before allowing a supply to be made as it was not taxable.

This means that 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.

In this case you did not give a written notice to the mortgagee in possession FSP stating that you were no longer registered for GST and were no longer considered to be carrying on an enterprise and that consequently the supply would not be a taxable supply if you were to make it.

It is also understood that you have been dealing with the FSP for some time and that at the time of supply of the land, the FSP:

· could be presumed to have a reasonable knowledge of your activities prior to the settlement of the two lots of land; and

· could have considered that you were likely to be registered based on their knowledge of your business activities; and

· could have also believed that the property was sold in the course or furtherance of the enterprise that you carried on.

As explained above, the FSP is liable to pay GST on the properties sold in satisfaction of the debts owed by you to them in the absence of your written notification. It appears that the FSP has made the decision to make the supply of the land as taxable based on the reasonable information available to them.

Therefore, it is the view of the Tax Office that the FSP could have made a taxable supply as the mortgagee in possession under Division 105 of the GST Act. Furthermore, there is insufficient information available to the Commissioner whether the FSP as a creditor had reasonable information or written evidence to believe that the supply would not be a taxable supply if you were to make them.

The Commissioner does however have review and amendment powers under the tax laws to ensure that taxes are correctly paid and credits are legally claimed. These powers can be exercised to ensure that the tax treatment of a supply or acquisition is correct.

In short, the Commissioner expects that GST treatment of the supply and acquisition is treated correctly in the Business Activity Statements of suppliers and recipients.

Therefore, it is the view of the Tax Office that the FSP and you should exchange the correct information to each other to ensure that the tax treatment to the supply of the land is correct. If you believe that the FSP has incorrectly made the supply of the land as taxable then it is your responsibility to advise the FSP the reasons why the supply would not be a taxable supply if you were to make it.

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