Edited version of your written advice

Authorisation Number: 1051232513122

Date of advice: 6 June 2017

Ruling

Subject: GST and sale of developed land as mortgagee in possession

Question 1

Will the sale of subdivided lots of land be exempted from goods and services tax (GST) given that the acquisition of the property was in the nature of a financial supply, the sale is not made in the course of an enterprise carried on by the supplier and the supplier is not registered for GST?

Answer

The sale of subdivided lots of land will not be exempted from GST. The sale will be a taxable supply and subject to GST. Please refer to the reasons for decision for details.

Question 2

If the sale of the subdivided lots of land is subject to GST, what will be the valuation date for the purposes of applying the margin scheme?

Answer

The valuation date for the purposes of applying the margin scheme would be the date on which the mortgagor is registered or required to be registered for GST. Please refer to the reasons for decision for details.

This ruling applies for the following periods:

01/07/2016 to 30/06/2017

Relevant facts and circumstances

● The entity lent $XXX to a mortgagor secured by a property before 1 July 2000.

● The entity acquired the property as mortgagee in possession as the mortgagor failed to repay the loan.

● The mortgagor was deregistered and was not carrying on an enterprise.

● The entity was carrying on an enterprise of a financial supply and now carrying on an enterprise of subdividing land for sale.

● The entity is not registered for GST.

● The entity has decided to develop the property into residential lots for sale.

● The entity has entered into a joint venture agreement with an unrelated entity to develop and sell the land and share the proceeds.

● The property was a vacant land and no farming or commercial activities have been carried out on the land.

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 9-20

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

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 75-10

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

Reasons for decision

Question 1

Under section 9-40 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), an entity must pay GST on any taxable supply that it makes. Division 105 of the GST Act 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 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.

(2) It does not matter whether you made the supply in the course or furtherance of an enterprise that you carry on; or you are registered or required to be registered.

(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.

(4) This section has effect despite section 9-5 (which is about what is a taxable supply).

In this case, the entity is subdividing and selling the mortgagor’s property, as mortgagee in possession, in order to satisfy the debt owed to the entity under the mortgage which meets the requirements of paragraph 105-5(1)(a) of the GST Act. The sale of the subdivided lots of land will satisfy the requirements of paragraph 105-5(1)(b) of the GST Act if the supply would have been taxable had it been made by the mortgagor. In order to determine if the supply, had it been made by the mortgagor, would be taxable, section 9-5 of the GST Act must be considered.

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 the indirect tax zone; 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.

The sale of the subdivided lots of land will be made in return for a payment; the property is located in the indirect tax zone; and the sale would have been in the course or furtherance of an enterprise if the mortgagor would have carried on the property development activities. The sale of the subdivided lots of land is neither GST-free under Division 38 of the GST Act, nor input taxed under Division 40 of the GST Act.

The only requirement that needs to be satisfied is whether the mortgagor would be required to be registered for GST had they been carrying on an enterprise of subdividing land for sale.

Annual Turnover Threshold

Under section 23-5 of the GST Act, you are required to be registered for GST if you carry on an enterprise and your GST turnover meets the registration turnover threshold. The current registration turnover threshold is $75.000.

To calculate your annual turnover you need to calculate the total value of any supplies you make or are likely to make over a 12 months period. This 12 months period covers the period of the current month and the preceding 11 months, known as your current annual turnover, and the current month and the following 11 months, known as your projected annual turnover.

If the mortgagor sells the subdivided lots of land, the consideration that would have been received by the mortgagor will be included in the calculation of both their current turnover and their projected turnover for their enterprise. The total consideration from the sale of the subdivided lots of land would exceed the GST turnover threshold of $75,000. This will require the mortgagor to be registered for GST.

Carrying on an enterprise

The term 'enterprise’ is defined in section 9-20 of the GST Act, which states:

An enterprise is an activity, or series of activities, done:

a) in the form of a business; or

b) in the form of an adventure or concern in the nature of trade; or

c) on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

d) …

Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number provides guidance on the meaning of 'an entity’ and 'enterprise’ for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Goods and Services Tax Determination GSTD 2006/6 Goods and services tax: does MT 2006/1 have equal application to the meaning of 'entity' and 'enterprise' for the purposes of the A New Tax System (Goods and Services Tax) Act 1999? provides that the principles in MT 2006/1 have equal application to the meaning of 'entity’ and 'enterprise’ for the purposes of the GST Act.

The activities of subdividing the lots of land for sale would satisfy the definition of carrying on an enterprise. Based on the facts provided, it is our view that the mortgagor would be carrying on an enterprise of property development had it been undertaken by the mortgagor.

Mortgagee in the shoes of a mortgagor

Property and Construction Industry Partnership – Issues Register explains at section 15.1.27 the role of a creditor when they dispose of a property as mortgagee in possession. Among the other things it states:

“Having regard for the provisions of Division 105 of the GST Act, the creditor (which could either be a receiver manager, mortgagee in possession or liquidator) is taken to be standing in the shoes of the debtor when the creditor makes the supply or is acting as agent for the debtor. As a result, for the purpose of the creditor applying the margin scheme to the sale, the words 'you’ as used in Division 75 is taken to mean the debtor”.

Although the entity will be carrying on the property development of subdividing the land in the capacity as a mortgagee in possession, as explained above, the entity is taken to be standing in the shoes of the mortgagor for GST purposes.

Conclusion

As explained above, the sale of the subdivided lots of land will be a taxable supply for the following reasons:

● The activities of subdividing the land for sale are considered as carrying on an enterprise.

● The consideration from the sale of the subdivided land will require the mortgagor to be registered for GST.

● The sale of the subdivided land will satisfy all the requirement of section 9-5 of the GST as explained above.

The entity, as a mortgagee in possession, is required to the report the sale of the subdivided lots of land to the ATO and remit the GST in relation to these supplies.

Question 2

Subsection 75-10(3) of the GST Act provides that subject to section 75-11, if:

● the circumstances specified in an item in the table in subsection 75-10(3) of the GST Act (the table) applies to the supply; and

● an approved valuation of the freehold interest, stratum unit or long term lease, as at the day specified in the corresponding item in the third column of the table, has been made.

the margin for the supply is the amount by which the consideration for the supply exceeds that valuation of the interest, unit or lease.

Therefore, the date when the valuation of the interest must be made will depend on which item in the table in subsection 75-10(3) of the GST Act applies.

Item 2 provides that where the supplier acquired the interest unit or lease before 1 July 2000, but does not become registered or required to be registered until after 1 July 2000, the valuation date is the earlier of either the date of effect of the entity’s registration or the day on which the entity applied for registration.

That is, Item 2 only applies to determine the valuation date in circumstances where the supplier was not registered or required to be registered until after 1 July 2000.

The mortgagor has acquired the property before 1 July 2000 and the entity has taken the possession of the property before 1 July 2000. Based on the information provided, the mortgagor was not registered for GST as at 1 July 2000. The sale of the subdivided lots of land will satisfy the requirements of Item 2 and as explained in question 1 it will require the mortgagor to register for GST. Therefore the valuation date for the purposes of using the margin scheme will be the date when the mortgagor would be required to be registered for GST.

Additional Information

GST return and Payment of GST

Since the entity, as the mortgagee in possession, is making a taxable supply pursuant to Division 105 of the GST Act and is not registered for GST, section 105-15 of the GST Act requires the entity to lodge a special GST return within 21 days after the end of the month in which the supply was made. Also, section 105-20 of the GST Act requires the entity to remit to the Tax Office, the GST amount on that supply at the same time.

As there is no specific Tax Office form available for this purpose, the return may be in the form of a letter which:

● is clearly marked 'Return under Division 105 of the GST Act’

● identifies the applicant’s name and address, as the supplier (creditor) making the return, and their ABN, if any

● states that the entity, as the supplier, is not registered for GST

● provides a reconciliation of the tax invoices with the amount of GST remitted, and

● is signed by the person required to remit the GST.

A copy of each tax invoice or document issued in place of a tax invoice should be attached to the letter.

The entity should submit the payment to the Tax Office directly by sending the payment together with the return.

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