Edited version of private ruling

Authorisation Number: 1011773378334

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Ruling

Subject: GST and supply in satisfaction of debt

Question 1

Whether the supply of the property located in Australia by the mortgagees in possession is a taxable supply for goods and services tax (GST) purposes?

Answer

Yes

Question 2

If the answer to question 1 is in the affirmative, can the margin scheme be applied?

Answer

Yes

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.

· You are the registered mortgagees pursuant to mortgage at a property located in Australia (the Property)

· You are not registered for goods and services tax (GST).

· The Property is registered in the name of entities (the Mortgagor) as tenants in common.

· As a result of the default by the Mortgagor under your mortgage, you took possession of the Property after 1 July 2000.

· You sold the Property in your capacity as mortgagees in possession exercising power of sale after the possession.

· The Property was marketed by your agent as having an approval from the local council for development attached to it.

· A property developer acquired the Property with the intention to construct residential premises on it.

Background

1. The Mortgagor

· The entity comprises of purchasers who are not registered for an ABN and GST.

· The Mortgagor bought the property under the margin scheme.

· The Property consists of vacant blocks of land.

· The vendors of the Property assigned to the Mortgagor the development application attaching to the Property, which approved construction of residential premises.

2. The development application

3. The surrounding finance and development application

4. The margin scheme

You have provided:

· An agreement between the Purchaser and that you signed by you prior to the settlement date and was counter signed by the authorised entities of the Purchaser at settlement.

· In the agreement, both parties agreed that the subject matter of the supply, the Property, under the sale contracted is a taxable supply and both parties agree that the Vendor will use the margin scheme in making the taxable supply.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

Yes, under section 23-5 of the A New Tax System (goods and Services Tax) Act 1999 (GST Act) the mortgagor is required to be registered for GST. Had the Property been supplied by the Mortgagor, the supply would be a taxable supply. You, as the mortgagee in possession exercising power of sale, are taken to be in the shoes of the Mortgagor when you make the supply. As a result, you are liable for the GST payable on the taxable supply.

Detailed reasoning

Section 9-40 of the GST Act provides that an entity must pay the GST on any taxable supply that the entity makes.

Division 105 of the GST Act makes a creditor liable for GST on supplies of a debtors' property where the supply is in satisfaction of a debt owed to the creditor.

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.

The entity who acquired the Property and became the Mortgagor, is not registered for an ABN and GST.

You have not received any written notice from the Mortgagor stating that the supply would not be a taxable supply if the Mortgagor were to make it.

However, you believe that on the basis of reasonable information that the supply would be a taxable supply if the Mortgagor were to make it.

For an entity to make a taxable supply, the following requirements under section 9-5 of the GST Act must be met:

· the supply is made for consideration

· the supply is made in furtherance of an enterprise that you are carrying on

· the supply is connected with Australia, and the supplier is registered or required to be registered for GST

In this circumstance:

Although the supply is made by the mortgagee in possession, the supplier considered below is the Mortgagor as provided for under Division 105 and 75 of the GST Act.

· The supply is made for monetary consideration.

· The supply is connected with Australia as the Property is located in Australia.

We need to consider whether the Mortgagor is required to be registered for GST. Please note that an entity is required to be registered for GST if the requirements under section 23-5 of the GST Act are met. Those conditions include a requirement that the entity is carrying on an enterprise in relation to the Property. Therefore, meeting the requirements under section 23-5 of the GST Act will also satisfy the requirement that the entity makes the supply in carrying on its enterprise.

Section 23-5 of the GST Act states:

Who is required to be registered

You are required to be registered under this Act if:

(a) you are *carrying on an *enterprise; and

(b) your *GST turnover meets the *registration turnover threshold

Asterisk denotes a defined term in the Act

Enterprise

The term 'enterprise' is defined in section 9-20 of the GST Act to include an activity, or series of activities, done in the form of a business or in the form of an adventure or concern in the nature of trade.

Miscellaneous Ruling MT 2006/1 provides the view of the Tax Office on whether or not an activity constitutes an enterprise for the A New Tax System (Australian Business Number) Act 1999 (ABN Act). Goods and Services Tax Determination GSTD 2006/6 provides that the view of the Tax Office expressed in the MT 2006/1 can be equally applied to the meaning of enterprise under the GST Act.

You do not have information to be able to conclude that the Mortgagor was involved in a business of property development. That is, the Mortgagor was conducting business activities on a regular or continuous basis. However, the sale of the Property can be considered to be an enterprise under the GST Act where activities, even one-off, are done in the form of an adventure or concern in the nature of trade.

An adventure or concern in the nature of trade may be an isolated transaction that does not amount to a business but which has the characteristics of a business deal.

There is no judicial guidance in Australian case law concerning the phrase an adventure or concern in the nature of trade'. The Tax Office's view in paragraphs 234 to 236 of MT 2006/1 follows the view that 'in the form of an adventure or concern in the nature of trade' includes an activity that if it had been done for profit would satisfy the ordinary concept test of 'adventure or concern in the nature of trade'.

Paragraph 237 of MT 2006/1 provides that:

The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business.

Specifically for land bought with the intention of resale, paragraph 270 of MT 2006/1 provides that these activities are considered to be an enterprise.

The information suggested the Mortgagor was carrying an enterprise in relation to the Property.

Registration threshold

Although the Mortgagor was carrying on an enterprise in relation to the Property, they are only required to be registered for GST if their turnover meets the registration threshold of $75,000 (unless they choose to do so).

Section 188-10 of the GST Act provides that an entity's turnover meets the registration threshold if:

· its current GST turnover is at $75,000 or higher and the projected turnover is below the threshold.

· Its projected turnover is at or above the threshold.

'Current turnover' is defined in section 188-15 of the GST Act to include all supplies made in the 12 months (ending at that month) other than input taxed supplies, supplies made for no consideration and are not taxable under section 72-5 of the GST Act, and supplies that are not made in connection with an enterprise that the

entity carries on.

'Projected turnover' is defined in section 188-20 of the GST Act to include the sum of all values of all supplies that an entity made during that month and the next 11 months. The exclusion in the calculation is similar to the exclusion in the calculation of the current turnover.

In this case, at the time of the sale of the Property, the Mortgagor's projected turnover exceeded the threshold. Hence, the Mortgagor is required to be registered for GST in relation to the supply of the Property.

Therefore, based on the information discussed above, the supply of the Property would be a taxable supply if the Mortgagor were to make it.

Under section 105-5 of the GST Act, the mortgagee in possession made a taxable supply.

Question 2

Summary

The margin scheme can be applied for the supply of the Property as the supply meets all of the requirements under section 75-5 of the GST Act.

Detailed reasoning

Subsection 105-5(1) of the GST Act provides that you make a taxable supply if:

· you supply the property of another entity (the debtor) to a third entity in or toward 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.

In your circumstances, the supply of the Property in satisfaction of debt has been considered a taxable supply of real property as discussed in question 1 above.

Subsection 75-5(1) of the GST Act provides that the margin scheme applies in working out the amount of GST on a taxable supply of real property that you make, amongst other things, selling a freehold interest in land, if you and the recipient have agreed in writing that the margin scheme is to apply.

Therefore, the following questions need to be addressed:

· whether the supply is eligible for the margin scheme

· whether the mortgagee in possession in exercising power of sale in relation to the real property can apply the margin scheme to the supply;

· whether the agreement is made within the time allowed under the GST Act.

Eligibility for the margin scheme

Subsection 75-5(2) (as amended by the 2005 Amendment Act) provides that the margin scheme does not apply if you acquired the entire freehold interest, stratum unit or long-term lease through a supply that was ineligible for the margin scheme.

Under subsection 75-5(3) of the GST Act a supply is ineligible for the margin scheme if:

(e) it is a taxable supply on which the GST was worked out without applying the margin scheme;

(f) it is a supply of real property you inherited and the deceased person acquired all of the real property through a supply that was ineligible for the margin scheme;

(g) it is a supply of real property and all of the following apply:

(iv) you acquired the real property from a fellow group member when you were a member of a GST group;

(v) the fellow group member had acquired it from an entity that was not a member of the GST group; and

(vi) this earlier supply was not eligible for the margin scheme because of the operation of subsection 75-5(2); or

(h) it is a supply of real property and both of the following apply:

(i) you acquired the real property from the joint venture operator of a GST joint venture at the time when you were a participant of a joint venture; and

(ii) (ii) the joint venture operator had acquired the real property through a supply that was ineligible for the margin scheme.

In your circumstances:

· the supply is a taxable supply of a freehold interest in land,

· the Property was previously supplied to the Mortgagor as a taxable supply and the margin scheme was applied to work out the GST liability for that supply,

· the Property was not inherited by the mortgagor and none of the factors in (c) above apply.

Therefore, the supply of the Property is eligible for the margin scheme.

Whether the mortgagees can apply the margin scheme

It is the view of the Tax Office that the mortgagees in possession can apply the margin scheme. This can be found in the public document 'Property and Construction Industry Partnership - Issues Register Section 15.1.27, it is reproduced in part as follows:

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.

When the agreement to apply the margin scheme must be made

Subsection 75-5(1) of the GST Act provides that you may use the margin scheme if the supplier and the recipient have agreed in writing that the margin scheme is to apply. Subsection 75-5(1A) provides that the agreement must be made on or before making the supply, or within such further period as the Commissioner allows.

Goods and Services Tax Ruling GSTR 2006/8 explains the margin scheme, when you can apply it and when do you supply or acquire real property.

The following paragraphs explain the view of the Tax Office on 'when the supply is made':

When do you supply or acquire real property?

36. Most legal interests in Torrens title land are created or transferred only upon registration of the relevant instrument.

37. However, because of the practical difficulties of determining precisely when the instrument is registered or lodged for registration that would arise if a literal interpretation of the law were to be taken, the Commissioner considers that Parliament would have intended that, in the context of GST, a less strict approach should apply.

38. For that reason, the Commissioner considers that for the sale of a freehold interest or stratum unit, the supply and the acquisition is made at settlement as this is when the purchaser (or the purchaser's agent) obtains:

· unconditional possession of a registrable instrument of transfer; or

· an instrument of transfer that would be registrable once stamped.

Therefore, the agreement by you and the recipient must be made on or before the settlement in order to meet the requirement in subsection 75-5(1A) of the GST Act. .

In your circumstances, you have advised and provided evidence that you signed the agreement on or prior to the settlement date and the recipient countersigned the agreement at settlement.

As all of the requirements for the application of the margin scheme contained in Division 75 of the GST Act are satisfied, the GST liability arising from the supply of the Property can be calculated under the margin scheme.

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