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Ruling

Subject: Mortgagee in possession and reasonable information

Question

Can the Commissioner confirm that subsection 105-5(3) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) applies to the sale of the Property by Entity A (the mortgagee) and that the supply of the Property is not a taxable supply?

Answer

No. The Commissioner considers that subsection 105-5(3) of the GST Act will not apply to the sale of the Property by Entity A (the mortgagee) and the supply of the Property will be a taxable supply.

Relevant facts and circumstances

Entity A is the mortgagee in possession of a property (the Property).

The mortgagor of the Property is a company (the debtor)

Entity A are selling the debtor's property in satisfaction of the debt that the debtor owes Entity A.

The Property is vacant land.

The debtor carried on an enterprise on the Property during their ownership.

The debtor was deregistered by the Australian Securities Investment Commission (ASIC), pursuant to section 601AB of the Corporations Act 2001 (Corporations Act).

Upon deregistration of the debtor with ASIC, the property of the debtor (including the Property), vests in ASIC, subject to the existing rights of the mortgagee (i.e. Entity A)

The debtor has been registered for GST from 1 July 2000 and continues to remain registered for GST on the Australian Business Register (ABR).

Entity A has not received a written notice from the debtor stating that the sale of the Property would not be a taxable supply if the debtor were to make it.

Relevant legislative provisions

105-5 of the GST Act

Reasons for decision

Section 9-40 of the GST Act provides that an entity must pay the GST payable on any taxable supply that the entity makes.

Under Division 105 of the GST Act, 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.

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

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.

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

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

(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.

In this case, Entity A is the mortgagee in possession of the Property and is selling the debtor's property, in satisfaction of a debt that the debtor owes to the Entity A. Further the debtor has not given Entity A any written notice stating that the sale of the Property would not be a taxable supply if the debtor were to make it. Accordingly, paragraph 105-5(3)(a) of the GST Act does not apply.

However, the issue arises as to whether the belief that the supply of the Property would not be a taxable supply if the debtor were to make it was formed on the basis of reasonable information, as outlined in paragraph 105-5(3)(b) of the GST Act.

A supply would be a taxable supply if all of the requirements listed in section 9-5 of the GST Act are satisfied. 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.

In this case, it is Entity A's submission that given the debtor was deregistered by ASIC it has ceased to exist. On this basis the debtor can not be carrying on an enterprise for the purpose of the GST Act. Accordingly, if the debtor is not carrying on an enterprise it is not required to be registered for GST. On this basis Entity A will have no GST liability in respect of the sale of the Property under Division 105 of the GST Act. That is, pursuant to paragraph 105-5(3)(b) of the GST Act Entity A submits that it is reasonable to conclude, using the ASIC registration information, that the supply of the Property would not satisfy the requirements of a taxable supply as the debtor would not be carrying on an enterprise.

We do not agree with this submission. Pursuant to paragraph 105-5(3)(b) of the GST Act Entity A is required to consider the treatment of the supply on the basis that the 'debtor were to make it'. Therefore to take an approach which treats the debtor as ceasing to exist does not reflect the intent of Division 105 which is discussed in the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 (the EM) and states:

…


6.174 You will be liable for GST on such a supply if the supply would have been a taxable supply if the debtor had made it.

6.175 This is because when you make a supply in satisfaction of a debt, you are in effect making the supply for the debtor. Therefore, a supply is a taxable supply when made by you if it would have been taxable if it had been made by the debtor. (emphasis added)

Accordingly, even though the debtor did not make the supply, the EM states that the creditor (i.e. Entity A) is in effect making the supply for the debtor and the circumstances of the debtor should be considered in deciding if the supply would be taxable.

Goods and Services Tax Ruling GSTR 2002/5, Goods and services tax: when is a 'supply of a going concern' GST-free? (GSTR 2002/5) discusses the Commissioner's view on the application of Division 105 of the GST Act. It states at paragraph 209 and 210 the following:

209. One view is that on a strict literal interpretation of subsection 105-5(3), a creditor could not sell a leasing enterprise, including the property from which it is conducted, that would otherwise have been a GST-free 'supply of a going concern' if hypothetically made by the debtor because the debtor would be unable to satisfy one or more of the three requirements in subsection 38-325(1). In particular, the debtor may not be able to:

(a) enter into an agreement required under paragraph 38-325(1)(c);

(b) supply all of the other things necessary for the continued operation of the enterprise as required under paragraph 38-325(2)(a); or

(c) carry on the enterprise to the day of supply as required under paragraph 38-325(2)(b).

210. We consider the better view is that by using the words 'if the debtor were to make it' in subsection 105-5(3) the legislation contemplates a hypothetical or notional supply by the debtor since 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 provision 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. If it could be concluded that a supply hypothetically made by the debtor in the same circumstances as the actual supply contemplated and made by the creditor would have satisfied the requirements of section 38-325 then the actual supply by the creditor is not a taxable supply.

In this case, the submission by Entity A that the debtor can not make a supply since the debtor has been deregistered with ASIC and ceases to exist is not consistent with the principle set out in paragraph 210 of GSTR 2002/5. Rather it is our view that when the GST Act contemplates a hypothetical or notional supply by the debtor with the use of the phrase "if the debtor were to make it", it implies that there is a debtor and that the debtor had made a notional supply. This hypothetical supply by the debtor, by its nature, is a fictional supply by the debtor, which would cover the situation where the debtor company has been deregistered with ASIC.

Accordingly we do not accept the mere cancellation of the debtor's registration with ASIC to be reasonable information on which an assessment of whether the supply would or would not be a taxable supply if made by the debtor can be based.

In this case, to determine whether the debtor's supply would or would not be a taxable supply by the debtor had they made it, Entity A would need to consider section 9-5 of the GST Act whilst the debtor was in existence. In doing so, the documents held by Entity A support a conclusion that the debtor's supply of the Property would be a taxable supply were they to make it. Relevantly, from the information retained by Entity A and the Australian Business Register it is evident that had the debtor made the supply:

· there would be a supply of the Property for consideration;

· the supply of the Property would be made in the course or furtherance on an enterprise carried on by the debtor;

· the debtor is registered for GST;

· the supply is connected with Australia; and

· the supply is not input taxed or GST-free

Therefore we do not agree with the conclusion reached by Entity A that the supply of the Property had the debtor made it is not a taxable supply. Accordingly where Entity A makes a supply of the Property section 105-5 of the GST Act will apply and Entity A will be liable for the GST.

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