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Edited version of private advice

Authorisation Number: 1052148648984

Date of advice: 28 July 2023

Ruling

Subject: GST - sale of property by mortgagee in possession

Question 1

Will you, < A and B >, in your capacity as mortgagee in possession, be entitled to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell each of the # number of new residential premises located at < address in Australia >?

Answer

The Commissioner is not able to rule without the necessary facts from the Debtor which are required to determine if all of the requirements for the application of the margin scheme contained in Division 75 will be satisfied.

You may apply for another ruling on this issue where you have the relevant facts from the Debtor that are declared as true and correct.

Question 2

Will you be entitled to input tax credits under section 11-20 of the GST Act for payments that you made to the builder which were required in order to bring the property to a saleable condition?

Answer

Yes, you will be entitled to the input tax credits under section 11-20 in relation to the building works where you acquired them in your own right and not on behalf of the Mortgagor. This is also provided:

•                the supply of the building works to you is a taxable supply made by the builder;

•                you will provide or are liable to provide consideration for the supply;

•                any payment you provide to the builder prior to your agreement with the builder to acquire their building works in your own right is not included in your entitlement to input tax credits.

This ruling applies for the following period:

DDMMYYYY to the date when the # number of developed properties are sold

The scheme commenced on:

DDMMYYYY

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

In this ruling, unless otherwise stated,

(i)         < X > (ABN: #)

(ii)        < Y > (ABN: #)

(iii)       < Z > (ABN: #)

1.         You have jointly applied for a private ruling on DDMMYYYY. < A > is registered for GST from DDMMYYYY. < B > is registered for GST from DDMMYYYY.

2.         On or about DDMMYYYY, you loaned funds of $ to an unrelated borrower. The Borrower being:

(i)        < X > (ABN: #)

(ii)       < Y > (ABN: #)

(iii)      < Z > (ABN: #)

The Borrower intended to use the funds to undertake a residential property development.

3.         The borrowings were secured by second mortgage over a number of properties.

4.         On DDMMYYYY, you entered into a deed of assignment with the first mortgage holder.

o   The first mortgage related to a facility agreement for an amount of up to $.

o   As a result of the assignment, you became the first mortgage holder over the properties.

o   The properties mortgaged to you by the Borrower are:

< address, Lot: # on RP#, Title Reference: # >

< address, Lot: # on RP#, Title Reference: # >

(collectively, the Properties)

5.         In MMYYYY, it became apparent that the Borrower was likely to default on the loans. A decision was made by you to exercise your rights as the mortgagee in possession. That is, you will sell the Properties toward satisfaction of the debt owed to you.

6.         The development activities include a #-lot subdivision of the land located at < addresses > and construction of a dwelling on each lot as new residential premises.

From the loan application documentation, the borrower has stated that all of the residential property development will be sold as new residential premises and will not be sold as vacant lots or retained for lease as residential premises or retained for private use e.g., as private residences. That is, the original loan was for the funding of the development of new residential premises which are to be sold as new residential premises.

7.         The development of the # number of residential premises is not yet completed, and further work is required to bring them into a saleable state.

In your role as the mortgagee in possession, you intend to finish the development and dispose of the three residential premises in order to facilitate repayment of the loans.

An outlay of around $ will be required to complete the construction.

It is estimated that the three residential premises will sell for around $ in total.

8.         At the time of sale, the # number of residential premises will satisfy the definition of 'new residential premises' as defined in the GST Act.

9.         You consider that, as the development was intended to be sold as new residential premises, the Mortgagor could not provide written notice that the supply would not be taxable. As such, had the Mortgagor sold the three new residential premises, the sales would be treated as taxable supplies.

10.      The margin scheme would have been available if the mortgagor had sold the properties.

You provided this statement with the following qualification "Assuming that all the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied, the mortgagee in possession (creditor) may apply the margin scheme in respect of the sale."

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 section9-5

A New Tax System (Goods and Services Tax) Act 1999 section9-40

A New Tax System (Goods and Services Tax) Act 1999 section11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

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

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

These reasons for decision accompany the Notice of private ruling for the < A and B >

This is to explain how we reached our decision. This is not part of the private ruling.

In this ruling, unless otherwise stated,

Question 1

Will you, < A and B >, in your capacity as mortgagee in possession, be entitled to apply the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you sell each of the three new residential premises located at 10 and 14 Arabella Street Bardon Queensland 4065?

Mortgagee in possession making a taxable supply?

Division 75 provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that an entity makes where certain requirements are satisfied.

Accordingly, it is relevant to firstly consider whether a taxable supply will be made by you, in your capacity as the mortgagee in possession, when you make a supply by way of sale of the three new residential premises, and then to consider whether you are entitled to apply the margin scheme to work out the amount of GST payable.

Under Division 105, 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. Accordingly, it is relevant to consider section 105-5 which provides:

(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:

(c)       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 supplywould not be a taxable supply if the debtor were to make it.

In your case, the requirements specified in paragraph 105-5(1)(a) will be satisfied because you will be selling the three new residential premises which belong to the Mortgagor, pursuant to your power of sale as the mortgagee in possession, to a third entity (a purchaser) towards satisfaction of the loan that the Mortgagor owes to you.

It now needs to be determined whether paragraph 105-5(1)(b) will also be satisfied - namely, if the Mortgagor (i.e., the Debtor) made the supply, whether the supply would have been a taxable supply.

Section 9-5 provides that an entity makes a taxable supply if:

(a) the entity makes the supply for consideration,

(b)        the supply is made in the course or furtherance of an enterprise that the entity carries on,

(c)        the supply is connected to the indirect tax zone (Australia), and

(d)        the entity is registered or required to be registered for GST.

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

Based on the facts you have provided we consider the following:

(a)       The supply by way of sale will be for consideration.

(b)       Where an entity engages in development and sale of properties, that entity would be making the supply in the course or furtherance of a property development enterprise that the entity carries on.

(c)       The supply would be connected with the indirect tax zone as the residential premises are located in Australia.

(d)       In relation to the sale, the Mortgagor would be required to be registered for GST if not already registered.

Accordingly, we consider paragraphs 9-5(a), (b), (c) and (d) would be satisfied and the sale of each of the three new residential premises would be a taxable supply. Based on the given facts, we do not consider the sale a GST-free or an input taxed supply.

Accordingly, had the Debtor made the supply, the supply would have been a taxable supply. This is provided subsection 105-5(3) does not apply to make the supply not taxable.

You have not provided us with a written notice from the Debtor referred to in paragraph 105-5(3)(a). We note you consider that, as the development was intended by the Mortgagor to be sold as new residential premises, the Mortgagor could not provide written notice that the supply would not be taxable. As such, you also consider that had the Mortgagor sold the three new residential premises, the sales would be treated as taxable supplies.

Under the above circumstances, we consider subsection 105-5(3) will not apply to make the supply of the three new residential premises non-taxable. Accordingly, as the requirements specified in paragraphs 105-5(1) (a) and (b) will be satisfied, your supply of the three new residential premises will be a taxable supply pursuant to section 105-5.

Mortgagee entitled to apply the margin scheme?

Having established that you will be making a taxable supply, it is relevant to further consider whether you will be entitled to apply the margin scheme to work out the amount of GST payable.

Division 75 provides for the application of the margin scheme.

The provisions of section 75-5 include:

(1) The * margin scheme applies in working out the amount of GST on a * taxable supply of * real property that you make by:

(a) selling a freehold interest in land; or

(b) selling a * stratum unit; or

(c) granting or selling a * long-term lease;

if you and the * recipient of the supply have agreed in writing that the margin scheme is to apply.

(1A) The agreement must be made:

(a) on or before the making of the supply; or

(b) within such further period as the Commissioner allows.

(ii)        However, the * marginscheme does not apply if you acquired the entire freehold interest, • stratum unit or * long-term lease through a supply that was * ineligible for the marginscheme.

Subsection 75-5(3) lists the situations where a supply is ineligible for the margin scheme to apply.

Section 195-1 explains that if the provision of the GST Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

Issue 15.1.27 of the Property and Construction Industry Partnership - Issues Register (the P&C Issues Register) explains the interaction between Division 75 - sale of freehold interest etc and Division 105 - supplies in satisfaction of debts. The following paragraphs are extracted for your information:

If all of the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied, the mortgagee in possession (creditor) may apply the margin scheme in respect of the sale.

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

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 a 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 word 'you' as used in Division 75 is taken to mean the debtor.

We need to apply the relevant provisions of Division 75 to the facts that relate to the Debtor (the term 'you' as used in Division 75) in order to determine if all of the requirements for the application of the margin scheme contained in Division 75 are satisfied. That is, the relevant facts required for the Commissioner to consider and rule on Division 75 will need to be provided by the Debtor.

In your submission, we note you state that "The margin scheme would have been available if the Mortgagor had sold the 3 new residential premises." and you qualified your statement that this is based on the assumption that all the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied.

Therefore, we consider that without the necessary facts from the Debtor, we are not able to determine if all of the requirements for the application of the margin scheme contained in Division 75 will be satisfied.

Additional information

You may apply for another ruling for the Commissioner to determine with certainty whether all of the requirements for the application of the margin scheme contained in Division 75 of the GST Act will be satisfied in relation to the sale of the Debtor's properties, with facts from the Debtor that are declared as true and correct.

Question 2

Will you be entitled to input tax credits under section 11-20 of the GST Act for payments that you made to the builder which were required in order to bring the property to a saleable condition?

Section 11-20 provides you are entitled to the input tax credits for any creditable acquisition that you make, and section 11-5 provides the meaning of a creditable acquisition:

You make a creditable acquisition if:

(a)       you acquire anything solely or partly for a *creditable purpose; and

(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 meaning of creditable purpose is set out in section 11-15:

(1)       You acquire a thing for a creditable purpose to the extent that you acquire it in *carrying on your *enterprise.

(2)       However, you do not acquire the thing for a creditable purpose to the extent that:

(a)       the acquisition relates to making supplies that would be *input taxed; or

(b)       the acquisition is of a private or domestic nature.

In this case, as the development of the three residential premises is not yet completed and further work is required to bring them into a saleable state, you (the mortgagee in possession) intend to finish the development and dispose of the premises in order to facilitate repayment of the loans. You also submitted that at the time of sale, the three residential premises will satisfy the definition of 'new residential premises' as the term is defined in the GST Act.

We consider that any building works provided by the builder to you, from the date you enter into an agreement with the builder for their supplies in your own right and not on behalf of the Mortgagor, are acquired by you.

Accordingly, where this is the case, your acquisition of the relevant building works will satisfy the requirements specified in subsection 11-15(1) to be for a creditable purpose and will be a creditable acquisition pursuant to section 11-5. That is, you will be entitled to the input tax credits under section 11-20. This is provided:

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