Edited version of your private ruling

Authorisation Number: 1051833652548

Ruling

Subject: GST and supply in satisfaction of debts

Question

Was the sale at public auction by the Council of the Property a taxable supply pursuant to section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, in part. The supply of the Property was a mixed supply.

The Property is a taxable supply except to the extent that it is an input taxed supply of residential premises pursuant to section 40-65 of the GST Act.

The Council will need to apportion the consideration for sale of the Property between:

•         the taxable part - the Complex, bush land and pasture and

•         the input taxed part - the House and land forming part of the residential premises.

Relevant facts and circumstances

The Council is registered for GST.

On ddmmyyy the Council sold by public auction, the Property pursuant to the relevant legislation (the Act).

The Property contains a Complex, a large amount of bush land and pasture and a house (the House).

Parts of the Complex and the House were damaged.

The House contains bedrooms a kitchen, loungeroom and bathroom.

The vacant portion of the Property is approximately 60% bush/vegetation and the remainder pasture. There is also a storage dam.

The Council had not issued any orders in regard to the House preventing its occupation as residential premises.

The Property was owned by the Company in its capacity as trustee of the Trust. The House was on the Property when purchased by the Trust. The Trust was registered for GST from ddmmyyyy.

From YYYY the Council issued demands to the Company for payment of unpaid rates for the Property and received no response or payment.

On ddmmyyy the Council issued the Company a notice (the Notice) pursuant to section 181(5)(a) of the Act for unpaid rates and charges in relation to the Property which was in arrears for more than three years.

The Council did not receive any payment and pursuant to the relevant provision of the Act began the sale process.

The Council did not receive any notice from the Company or the Trust that the supply of the Property would not be a taxable supply.

The Council believed the supply of the Property would not be a taxable supply but was not able to supply a document setting out the basis for this belief and the staff that made the decision have left the Council.

On ddmmyyyy the Lawyers (acting for the Council) notified the liquidators of the Company that by order of the relevant court, that the Property was to be sold by auction pursuant to the relevant section of the Act.

The Property was sold to the Purchaser.

A copy of the Contract of sale of land (the Contract) for the Property and a copy of the settlement statement for the sale has been provided.

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 40-65

A New Tax System (Goods and Services) Tax Act 1999 Division 105

A New Tax System (Goods and Services) Tax Act 1999 Section 195-1

Reasons for decision

Division 105 of the GST Act provides that supplies by creditors in satisfaction of debts may be taxable supplies.

Subsection 105-5(1) provides that 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.

Subsection 105-5(2) provides that 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 for GST.

However, subsection 105-5(3) provides that 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, the Council (the Creditor), sold the Property of the Trust (the Debtor) to a third party to recover a debt of unpaid rates.

Neither the Debtor nor any of its representatives gave the Council a notice stating the supply would not be a taxable supply.

The Council did not believe that the supply would be a taxable supply but is unable to supply any documentary evidence for the basis of this decision.

Therefore, where the supply would have been a taxable supply had the Trust (Debtor) made the supply, then the Council (the Creditor) would be liable for GST on the sale.

This requires us to look at whether, had the Trust made the supply, the supply of the Property would have been a taxable supply.

Section 9-5 provides that you make a taxable supplyif:

(a) you make the supply for consideration

(b) the supply is made in the course or furtherance of an enterprise that you carry on

(c) the supply is connected with the indirect tax zone (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.

In this case, consideration was paid for the supply of the Property which was located in Australia. The supply would have been made in the course or furtherance of the Trusts' enterprise[1] and the Trust was registered for GST. Further, the supply was not GST free.

Therefore, the supply of the Property will be a taxable supply except to the extent it is input taxed.

Where the supply of the Property has both taxable and non-taxable (input taxed) parts, the supply will be a mixed supply and will require apportionment.

Input taxed supply

Section 40-65 provides that a supply of real property is input taxed to the extent that the property is residential premises to be used predominately for residential accommodation (regardless of the term of occupation). However, the supply is not input taxed to the extent the residential premises are new residential premises or commercial residential premises.

Residential premises are defined as:

residential premises means land or a building that

(a) is occupied as a residence or for residential accommodation; or

(b) is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation;

(regardless of the term of the occupation or intended occupation) and includes a *floating home.

Paragraph 9 and 15 of Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises provides the following discussion on what is residential premises:

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation....

...

15. To satisfy the definition of residential premises, premises must provide shelter and basic living facilities. Premises that do not have the physical characteristics to provide these are not residential premises to be used predominantly for residential accommodation.

As per paragraph 9 and 15 of GSTR 2012/5 the focus is on the physical characteristics of the premises, and the premises must provide shelter and basic living facilities. In this case, the House has the physical characteristics of residential premises in that it has bedrooms, a lounge room, bathroom and kitchen and was suitable and capable for residential accommodation. Therefore, the House meets the definition of residential premises.

However, as the House had some damage it is also necessary to consider whether the House was fit for human habitation as outlined in paragraphs 20 to 22 of GSTR 2012/5:

Fit for human habitation

20. Premises must be fit for human habitation in order to be suitable for, and capable of, being occupied as a residence or for residential accommodation. An objective consideration of the relevant facts and circumstances determines whether residential premises are fit for human habitation. Residential premises are not fit for human habitation when they are in a dilapidated condition which prevents them being occupied for residential accommodation.

21. Residential premises that are either:

•         in a minor state of disrepair; or

•         subject to a temporary legal prohibition for occupation pending minor repairs;

are still suitable for, and capable of, being occupied as a residence or for residential accommodation.

22. A partially built building is not residential premises until it becomes fit for human habitation. Contractual or legal prohibitions against residential occupation do not prevent premises from being suitable for, and capable of, providing residential accommodation.

As there was no legal prohibition for occupation or council orders issued regarding occupation of the House preventing it from being suitable for, and capable of, providing residential accommodation, the House was fit for human habitation.

The House includes some of the surrounding land which forms part of the residential premises. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case as outlined in paragraph 46 of GSTR 2012/6:

Land supplied with a building

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

The Council will need to determine the extent to which the land surrounding the House forms part of the residential premises.

In conclusion, the supply of the House (including the land which forms part of the residential premises) satisfies the definition of residential premises. Further, the House is not new residential premises (as the House has been previously sold as residential premises) or commercial residential premises (further detail below). Therefore, the supply of the House was an input taxed supply.

Taxable supply

The balance of the Property, (that is, excluding the House and land forming part of the residential premises) consists of the Complex, the bush land and pasture areas. We will consider these remaining parts.

Relevantly, under paragraph 40-65(2)(a) a supply of residential premises is not input taxed to the extent the residential premises are commercial residential premises.

Commercial residential premises are defined as:

Commercial residential premises means:

(a) a hotel, motel, inn, hostel or boarding house; or

(b) premises used to provide accommodation in connection with a *school; or

(c) a *ship that is mainly let out on hire in the ordinary course of a *business of letting ships out on hire; or

(d) a ship that is mainly used for *entertainment or transport in the ordinary course of a *business of providing ships for entertainment or transport; or

(da) a marina at which one or more of the berths are occupied, or are to be occupied, by *ships used as residences; or

(e) a caravan park or a camping ground; or

(f) anything similar to *residential premises described in paragraphs (a) to (e).

As outlined above the House is residential premises. We do not consider the House is commercial residential premises as the House is not one of, or anything similar to, the residential premises listed in the definition of commercial residential premises.

However, whilst the Complex will satisfy the definition of 'residential premises' because the premises provide shelter and basic living facilities as outlined in paragraphs 9 and 15 of GSTR 2012/5, it is necessary to consider whether the Complex, is commercial residential premises.

The definition of 'commercial residential premises' includes a caravan park or camping ground or anything similar.

Goods and Services Tax Ruling GSTR 2012/6 Goods and services tax: commercial residential premises provides the ATO view on what constitutes commercial residential premises. Relevantly, paragraphs 109 and 110 provide:

109. The terms 'caravan park' and 'camping ground' are not defined in the GST Act and take their ordinary meanings in context.

110. Occupants of a caravan park or camping ground may stay in a caravan, a moveable home,^... a permanent cabin or villa, or a tent provided by the operator on site. Alternatively, guests may park their own caravan, motor home, camper trailer or the like on a site or pitch their own tent on a site. Sites may be powered or un-powered. Accommodation in a caravan park or camping ground is held out to the public as accommodation for travellers although long-term accommodation may also be provided to occupants. Caravan parks and camping grounds are operated on a commercial basis or in a business-like manner.

We consider that the Complex is commercial residential premises and as such, the supply of this part of the Property will not be input taxed pursuant to paragraph 40-65(2)(a). The supply of the Complex was a taxable supply of commercial residential premises pursuant to section 9-5.

The remaining balance of the Property (the bush land and pasture) does not meet the definition of residential premises nor commercial residential premises (as outlined above). The supply of the bush land and pasture was a taxable supply of land pursuant to section 9-5.

In summary, we consider that the supply of the Property was a mixed supply comprising:

1.    The House (including land associated with the residential premises) being an input taxed supply of residential premises.

2.    The Complex being a taxable supply of commercial residential premises.

3.    The bush land and pasture not associated with the commercial residential premises or residential premises being a taxable supply of land.

Therefore, pursuant to section 105-5, the Council's sale at public auction of the Property was a taxable supply except to the extent that it was an input taxed supply. As described above there are two parts:

•         the taxable part - the Camping Complex, bush land and pasture

•         the input taxed part - the House and land forming part of the residential premises.

Goods and Services Tax Ruling GSTR 2001/8 Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts provides guidance on apportionment where there is a mixed supply.

The Council is required to apportion the consideration (sale price) on the supply of the Property between these two parts to find the consideration for the taxable part. Accordingly, the Council must pay the GST payable on the taxable part of the supply, pursuant to section 9-40.

Relevantly, paragraphs 25 to 27 of GSTR 2001/8 state:

Apportionment of the consideration for a mixed supply

25. GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply between the taxable and non-taxable parts to find the consideration for the taxable part.

26. Apportionment must be undertaken as a matter of practical commonsense. You can use any reasonable basis to apportion the consideration. Depending on the facts and circumstances of the supply, a direct or indirect method may be an appropriate basis upon which to apportion the consideration and ascertain the value of the taxable part of the supply. The basis you choose must be supportable in the particular circumstances.

27. You should keep records that explain the basis used to apportion the consideration between the taxable and non-taxable parts of a supply.^...

The Council can use any reasonable basis to apportion the consideration received of $X. The Council will need to keep records of the basis of the decision.

Paragraph 97 of GSTR 2001/8 provides the following suggestion:

Direct methods

97. Direct methods use relevant variables that measure the connection between what is supplied (the taxable and non-taxable parts) and the consideration for the actual supply. A direct method usually gives you the most accurate measure of the consideration for (and therefore, the calculation of the value of) the taxable part of the supply you make (that is, the value of the taxable supply). Such methods may include:

•      the price allocation as agreed between the parties to the supply (see paragraphs 97A to 97M of this Ruling);

•      the comparative price of each part if it were supplied on its own, relative to the whole payment received (see paragraphs 98 to 103D of this Ruling);

•      the relative amounts of rental consideration (see paragraph 103E to 103F of this Ruling);

•      the relative amount of time required to perform the supply (see paragraphs 104 to 105 of this Ruling); and

•      the relative floor area in a supply of property (see paragraphs 106 to 108 of this Ruling).

[1] Carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise (section 195-1).

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