Edited version of private ruling

Authorisation Number: 1011828569763

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Ruling

Subject: Goods and services tax (GST): Supplies in satisfaction of debt

Question 1

Is your supply of real property located in Australia, a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, your supply of real property is a taxable supply under the GST Act.

Question 2

Can you apply the margin scheme in calculating the amount of GST applicable to the sale?

Answer

No, you cannot apply the margin scheme in calculating the amount of GST applicable to the sale.

Question 3

Can you claim any GST credits in relation to the construction costs expended by the other parties to your arrangement (in any capacity)?

Answer

No, you cannot claim any GST credits in relation to the construction costs expended by the other parties (in any capacity).

Relevant facts and circumstances

Entity A who was registered for GST acquired real property located in Australia as a vacant piece of land. You do not know whether it was acquired as a taxable supply with the margin scheme applying. Entity A was registered for GST from July 2000 to a specified date.

Entity A borrowed funds from Entity B in order to complete the purchase and develop the real property to sell at a profit. The loan was secured by registered mortgage over the real property and another block. Entity B is registered for GST.

The development undertaken by entity A on the real property was of a single residential structure however entity A subsequently defaulted on the loan from entity B.

The property was taken over by entity B as mortgagee exercising its power of sale.

Entity B went into receivership and a voluntary administrator was appointed. On a specified date the creditors of Entity B resolved that the company would enter into a deed of company arrangement (DOCA). The deed of company arrangement was executed on a specified date.

On a later date the debenture holders passed a resolution whereby the trustee was directed to amongst other things enter into an amended DOCA, retire the receivers and return control of the company to the directors. This deed vested the day to day management of the company in the company's directors. However, the control was limited to the completion of existing projects and realisation of existing assets. The company could not enter into any new loans. The company may incur further debt in priority to secured creditors as necessary to complete existing projects.

Entity A was declared bankrupt after this date and at that stage the development was 75 percent complete.

On a specified date, you (entity C) agreed to provide a loan to entity B to enable the company to complete the development. You are registered for GST.

In consideration of this, entity B assigned to you the benefit of entity A's mortgage as security for the loan from you to entity B.

When the property was sold to a third party it was initially considered that it would be entity B that would be making the sale. However, you were advised by the relevant state Authority that as you were now the mortgagee named on the title (following the transfer of the benefit of the mortgage to you by entity B then you should be noted as the vendor and the entity making the supply.

The contract for sale was marked as a taxable supply with the margin scheme applying.

Settlement was effected and you paid the receivers of entity B the net sale proceeds after deducting amounts owing to you in respect to the loan and an amount to cover any GST liability on the sale.

Entity A has not given entity B or you written notice stating that the supply would not be a taxable supply if they were to make it.

Entity B has not given you written notice stating that the supply would not be a taxable supply if they were to make it.

Entity B and you are not associated in any way.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 11-5.

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 Section 75-5

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

Reasons for decision

Question 1

Division 105 of the GST Act contains special provisions about supplies in satisfaction of debts. This Division applies to supplies made by a creditor (which could either be a receiver manager, mortgagee in possession or a liquidator), of property belonging to a debtor, where the supply is in satisfaction of a debt owed to the creditor.

Subsection 105-5(1) of the GST Act provides that 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 taxable supply.

Further, subsection 105-5(2) of the GST Act provides that 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.

According to the relevant state authority an assignment of mortgage is a transfer of the mortgage debt and conveyance of the legal estate of the mortgagee in the mortgaged property. It vests the debt and estate in the assignee, together with all the rights, powers and remedies of the mortgage.

In this case you meet section 105-5(1) (a) of the GST Act because you are selling entity A's property to a third party, in or towards satisfaction of a debt that was assigned to you when the mortgage was assigned. Therefore we need to look at paragraph 105-5(1)(b) to see whether, had the debtor (entity A) made the supply it would have been a taxable supply.

The property being sold is a new single residence.

Section 9-5 of the GST Act provides that you make a taxable supply if:

(a) you make the supply for consideration; and

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

(c) the supply is connected with Australia; and

(d) 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.

If entity A had made the supply then it would have been a taxable supply if entity A was registered for GST because:

· the supply was made for consideration

· It was in the course of an enterprise that entity A carried on

· The property was in Australia and

· In addition there is no section of the GST Act that would make the supply of entity A's new residential premises input taxed or GST free.

Please note that a sale of residential premises is input taxed under section 40-65 of the GST Act, but not if they are commercial or new residential premises. However In this case entity A would have sold new residential premises as per section 40-75 of the GST Act had entity A made the supply.

However entity A was not registered at the time of supply and therefore we need to look at whether they were required to be registered for GST.

Section 23-5 of the GST Act provides that 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.

Therefore in the case of entity A he would have been required to be registered had he made the supply because

he was carrying on an enterprise and

the consideration received for the premises exceeds the registration turnover threshold.

Therefore the supply of the real property would have been a taxable supply had entity A made the supply as all the conditions for a taxable supply are met.

However, subsection 105-5(3) of the GST Act 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.

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

Therefore, as the exception in subsection 105-5(3) of the GST Act does not apply, and the requirements of subsection 105-5(1) of the GST Act are satisfied, you are making a taxable supply when you sell the real property of the entity A in or towards satisfaction of a debt owed to you.

Question 2

ATO Interpretative Decision 2001/112 provides that 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 of the GST Act is taken to mean the debtor.

If the debtor, (entity A) was able to apply the margin scheme in line with section 75-5 of the GST Act, the creditor (you) may also choose to apply the margin scheme in respect of the sale.

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 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.

Subsection 75-5(1A) of the GST Act provides that the agreement must be made:

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

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

However, subsection 75-5(2) 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.

Subsection 75-5(3) of the GST Act defines supplies that are ineligible for the margin scheme. It provides that a supply is ineligible for the margin scheme if amongst other things:

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

We understand that you do not have enough information to establish whether entity A acquired the entire freehold interest through a taxable supply on which the GST was worked out without applying the margin scheme. Therefore, you cannot apply the margin scheme because you do not know whether you satisfy paragraph 75-5(3)(a).

Question 3

Can you claim any GST credits in relation to the construction costs expended by the other parties to your arrangement (in any capacity)?

Under section 11-20 of the GST Act you are entitled to the input tax credits for any creditable acquisition that you make.

Section 11-5 provides that 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 for GST.

All of the above criteria must be met if you are to make a creditable acquisition.

Under subsection 11-15(1) of the GST Act you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise.

You are seeking to claim GST credits in relation to the construction costs expended by other parties in completing the development.

You are not entitled to any GST credits in relation to that expenditure as you have not acquired the building services. Therefore, you do not satisfy section 11-5(a) of the GST Act as entity A and entity B were the entities that acquired the building services.