Edited version of your written advice

Authorisation Number: 1051226152264

Date of advice: 5 May 2017

Ruling

Subject: Sale of Property: Mortgagee in Possession: Margin Scheme

Question 1

Is the sale of the Properties a taxable supply where the Vendor is a mortgagee exercising a power of sale?

Answer

Yes

Question 2

Is the acquisition of the Properties a creditable acquisition of the Purchaser and will the Purchaser be entitled to an input tax credit?

Answer

Yes

Question 3

Can the margin scheme be used to work out the GST on the supply of the Properties from the Vendor to the Purchaser?

Answer

Yes

Question 4

If the Vendor and Purchaser elect to use the margin scheme to work out the GST, how is the GST calculated in respect of the supply of the Properties?

Answer

Please refer to the detailed legal reasoning contained herein.

Relevant facts and circumstances

1. C acquired the following properties:

(a) Property 1. The transfer of Property 1 was registered on X. The consideration was $Y.

(b) Property 2. The transfer of Property 2 was registered on X. The consideration was $Y.

(c) Property 3. The transfer of Property 3 was registered on X. The consideration for the transfer of Property 3 was $Y.

(d) Property 4. The transfer of Property 4 was registered on X. The consideration for the transfer of Property 4 was $Y.

2. None of the vendors were registered for GST.

3. C demolished the residential homes on Properties 1 - 4 (“the Properties”) and the Properties are vacant land.

4. In 20XX, C obtained a development approval for the construction of X townhouses on the Properties. Work commenced on excavation for the development but was stopped in or about X due to lack of finance.

5. C provided a mortgage over the Properties to a financier (“Mortgagee”) C granted the first mortgage over the Properties to secure the repayment of secured moneys provided by the Mortgagee under a loan agreement entered into by C and the Mortgagee (“Mortgage”).

6. C defaulted on his obligations under the loan and the Mortgagee exercised its power of sale under the Mortgage.

7. P (“Vendor”) entered into a contract for sale (“Contract”) of the Properties with K as trustee for K Trust (“Purchaser”). The purchase price was $Y exclusive of GST.

8. The Purchaser has agreed to pay the Vendor the amount of GST payable in respect of the sale of the Properties at settlement of the Contract at which time the GST payable will have been determined.

9. A condition of the Contract provides that settlement will occur 28 days after a private ruling is issued by the Australian Taxation Office in respect of the GST treatment of the sale (“the Ruling”).

10. The Purchaser and Vendor will agree upon the GST treatment of the sale of the Properties and be able to quantify the GST after receiving the Ruling.

11. C is registered for GST.

12. The purchaser will be registered for GST before settlement of the Contract.

13. P and B are registered for GST.

14. The vendor wrote to C requesting a written statement:

a) confirming whether or not the supply of the Properties to the Purchaser would be a taxable supply if he were to make it; and

b) if the supply of the Properties were not a taxable supply, explaining the reasons why the supply would not be taxable.

15. The Vendor's solicitors also requested a copy of the contracts in relation to the purchase of the Properties by C but received no response.

16. A land value search showing the size of each of the Properties will be used for apportioning the consideration for the supply for each property to apply the margin scheme.

Relevant legislative provisions

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

A New Tax System (Goods and Services Tax) Act 1999 section 75.

Reasons for decision

Question 1

Under section 9-40 an entity must pay the GST on any taxable supply that it makes.

Division 105 applies to make a creditor liable for GST on certain supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor. This division applies to sales made by a mortgagee in possession.

Section 105-5 states:

105-5 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 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).

At settlement the Vendor (a creditor) will be supplying the Properties to the Purchaser (a third party) in satisfaction of a debt that C owes to the Vendor.

Based on the information you have provided, the supply by C would have been a taxable supply because:

● C was registered for GST;

● The demolition of the houses on the Properties, development approval, and commencement of excavation suggests that C was carrying on a property development enterprise;

● The sale of the Properties by C would have been in the course or furtherance of his enterprise;

● C previously attempted to sell the Properties to a company for a figure expressed to be “plus GST”;

● The Vendor wrote to C seeking confirmation of whether the supply of the Properties, if made by C, would have been a taxable supply and C did not respond.

● On the facts at hand, the sale of vacant land is not input taxed and not GST free in the circumstances and is a taxable supply.

As a consequence of the operation of section 105-5, the supply of the Properties is a taxable supply.

Question 2

Section 11-5 states:

You make a creditable acquisition if:

(a) You acquire anything solely or partly for a creditable purpose;

(b) The supply of the thing to you is a taxable supply; and

(c) You provide, or are liable to provide, consideration for the supply; and

(d) You are registered, or required to be registered.

The acquisition of the Properties by the Purchaser will be a creditable acquisition because:

1. the Purchaser will be registered for GST at the date of settlement;

2. the Purchaser is acquiring the Properties solely for a creditable purpose because it will use the Properties in its property development enterprise;

3 by virtue of section 105-5 and the facts and circumstances the supply of the Properties is a taxable supply; and

4 the Purchaser will provide consideration for the supply.

Section 11-20 states:

You are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-25 states:

The amount of the input tax credit for a creditable acquisition is an amount equal to the GST payable on the supply of the thing acquired.

Based on the information you have provided, the Purchaser is therefore entitled to an input tax credit equal to the GST payable on the supply of the Properties.

Question 3

Under section 75-5 the GST on a taxable supply of real property made by selling a freehold interest in land can be calculated using the margin scheme provided:

● the vendor and the purchaser have agreed in writing that the margin scheme is to apply;

● the written agreement is made on or before the making of the supply;

● the supply is not ineligible for the margin scheme.

ATOID 2001/12 states:

Under section 75-5 of the GST Act, 'you' choose to apply the margin scheme if 'you' make a taxable supply of real property by selling a freehold interest in land.

The debtor, had it sold the property, would have been able to apply the margin scheme. Therefore, it must be considered whether the word 'you' can still be taken to mean the debtor, where the creditor, rather than the debtor is making the supply.

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

Having regard for the provisions of Division 105 of the GST Act, the creditor is taken to be standing in the shoes of the debtor when the creditor makes the supply. Therefore, for the purpose of the creditor applying the margin scheme to the sale, the word 'you' as used in section 75-5 is taken to mean the debtor.

As the debtor was able to apply the margin scheme in line with section 75-5 of the GST Act, the entity may also choose to apply the margin scheme in respect of the sale.

On the information you have provided, the supply of the Properties by the Vendor to the Purchaser is a taxable supply and is not ineligible for the margin scheme.

As you have stated that a written agreement was entered into between the Vendor and Purchaser before the time of supply (settlement), the margin scheme can be used by the Vendor who is a mortgagee in possession exercising its power of sale of the mortgagor's Properties to calculate the GST payable.

Question 4

Section 75-10(1) provides:

If a taxable supply of real property is under the margin scheme, the amount of GST on the supply is 1/11th of the margin for the supply.

Applying subsection 75-10(2), the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest in the properties.

Margin for Property 1

Property 1 was acquired by C before 1 July 2000 and C first became registered for GST from 1 July 2000.

Accordingly, the margin can be calculated under either of:

1. the consideration method in section 75-10(2); or

2. the valuation method in section 75-10(3)..

The parties can choose to calculate the margin using the valuation method. Section 75-16(2) provides that different margin provisions can apply to various parts of the acquisition.

The margin for the supply of Property 1 under the valuation method is the amount by which the consideration for the supply of Property 1 exceeds the valuation of the interest in Property 1 as at 1 July 2000 (per item 1 of the table in section 75-10(3).

In order to apply the valuation method for calculating the margin, a valuation of the interest in Property 1 as at 1 July 2000 must be calculated by obtaining an approved valuation of Property 1 as at 1 July 2000 which is in accordance with the A New Tax System (Goods and Services Tax) Margin Scheme Valuation Requirements Determination MSV 2009 / 1. The valuation must be obtained before the date of the supply.

Margin for Properties 2 to 4

The margin for the supply of the other Properties should be calculated in accordance with the methods set out in Goods and Services Tax Ruling GSTR 2006/8 (Goods and services tax: the margin scheme for supplies of real property acquired on or after 1 July 2000).

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