1012630389518 | Legal database

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Edited version of private advice

Authorisation Number: 1012630389518

Ruling

Subject: GST and sale of commercial property by mortgagee

Question

Will the goods and services tax (GST) apply to the sale of the commercial property located in Australia by the mortgagee?

Advice

No, GST will not apply to the sale of the commercial property located in Australia by the mortgagee because based on the information received the sale of the property will not be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Relevant fact

The commercial property located in Australia is owned by two entities as tenants in common. The owners lease the property after the purchase was made and they are not registered for GST.

Company X (you) is registered as the mortgagee for the commercial property in the Mortgage document. The mortgage is in default and you are considering selling the commercial property at auction.

You advised that the commercial property will be sold unoccupied and you are not registered for GST.

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 23-5

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

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

Reasons for decision

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

Section 105-5 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.

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).

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

A mortgagee is a type of creditor. Therefore it is the responsibility of the mortgagee in possession of the real property to determine that the supply of property it makes on behalf of its debtor is taxable or not.

Under paragraph 105-5(3)(b) of the GST Act, where the debtor has not given a written notice that the supply would not be a taxable supply, the onus is on the creditor to obtain relevant information to determine the GST status of the supply the creditor makes of the debtor's property in settlement of its debts.

We will now consider the GST status of the sale of the property if the debtor was to sell the property.

Taxable supplies

GST is payable on a taxable supply. You make a taxable supply under section 9-5 of the GST Act 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 for GST.

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

All of the above requirements must be satisfied for the supply of the property to be a taxable supply under section 9-5 of the GST Act.

From the information received, if the debtor has sold the property they would satisfy paragraphs 9-5(a), 9-5(b) and 9-5(c) of the GST Act as:

• the debtor would make the supply for consideration;

• the supply would be made in the course of the leasing enterprise carried on by the debtor; and

• the supply is connected with Australia as the property is located in Australia.

There is no provision in the GST Act that makes the supply of the commercial property in Australia GST-free or input taxed.

We will now consider whether the debtor would be required to be registered for GST as they are currently not registered for GST (paragraph 9-5(d) of the GST Act).

Paragraph 9-5(d) of the GST Act

Under section 23-5 of the GST Act, you are required to be registered if:

• you are carrying on an enterprise, and

• your GST turnover meets the registration turnover threshold (currently $75,000).

Under subsection 188-10(1) of the GST Act, you have a GST turnover that meets a particular turnover threshold when:

a) 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

b) your projected GST turnover is at or above the turnover threshold.

Under section 188-15 of the GST Act your current GST turnover is the sum of the values of all the supplies that you made, or are likely to make, during the current month and the preceding 11 months.

Section 188-20 of the GST Act defines projected GST turnover to be the sum of the values of all the supplies that you made, or are like to make during that month and the next 11 months.

Section 188-25 of the GST Act excludes certain supplies made when working out the projected GST turnover. Section 188-25 of the GST Act requires you to disregard the following when calculating your projected GST turnover:

a) any supply made, or like to be made, by you by way of transfer of 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.

From the facts given, the debtor was deriving their income by leasing the property. Accordingly, the property is a capital asset held by the debtor and the ownership of the asset will be transferred when sold. When considering the projected GST turnover of the debtor, the consideration received from the sale of the property would not be included under section 188-25 of the GST Act. In this instance the debtor would not be required to be registered for GST as currently they are not registered for GST.

Paragraph 9-5(d) of the GST Act would therefore not be satisfied where the debtor was to sell the property since the debtor is not registered for GST and would not be required to be registered for GST.

Summary

As all the requirements in section 9-5 of the GST Act would not be satisfied, the sale of the debtor's commercial property would not be a taxable supply and therefore would not be subject to GST.

Accordingly, you will not be liable for GST when you sell the debtor's property at auction under section 105-5 of the GST Act.

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