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Ruling
Subject: Mortgagee exercising its power of sale
Question
Are you making a taxable supply when you exercise your power of sale as a mortgagee in possession over the property?
Advice
No, you are not making a taxable supply when you exercise your power of sale as a mortgagee in possession over the property.
Relevant facts and circumstances
Your solicitor has provided the following information:
You are exercising your power of sale over a property held in the name of the mortgagor.
The property of the debtor is made up of a number of separate certificates of title and consists of the following adjoining lots:
Lot XX - old residence used for residential accommodation
Lot XY - non residential structure - previously used for private purposes
Other lots are vacant - They are affected by the surrounding environment.
Council has fully prohibited any use other than continuing residential use and only upon the existing structures on lots XX & XY. Nothing can be built on the other lots.
You advise that the mortgagor has defaulted under a mortgage in your favour.
You have provided a copy of:
· A registered Transfer for the initial purchase by the mortgagor of the residential lot XX for a specified amount
· A registered Transfer for the initial purchase of the balance of the lots for a specified amount.
· The front page of the current Contract for Sale by you for auction.
When Entity A applied for the loan from you, it declared it owned the property as a company and not on behalf of any trust. You further advise that while the registered transfer in relation to the residence, records Entity A as trustee of Trust B, your understanding is that such a trust was never established.
You have also provided a copy of a statutory declaration from the director of the mortgagor entity, Entity A. This declaration establishes that the property was occupied as a residence before 2 December 1998. The mortgagor acquired the property after 1 July 2000.
You have not been provided with any ABN or GST details for entity A. A search of the Australian Business Register confirms that they do not have an ABN.
You intend to sell the property at auction and will use the margin scheme in calculating any GST obligation if the supply is a taxable supply.
On your reasonable enquiries the property was only used for private purposes. Since you advanced the loan to the mortgagor you have no knowledge of it receiving any rent or income from the property.
Your Solicitor makes the following contentions:
· The mortgagor is not carrying on an enterprise on the property.
· Your intended sale of the combined lots "englobo" and used for residential purposes shall not be a taxable supply.
· The structure on lot XY was used for private purposes and the other lots were used as curtilage to the residence on lot XX.
· The other lots are not capable of being used or developed.
· The sale is not made in the course or furtherance of an enterprise that the mortgagor carries on or the property is input taxed because the sale is of eligible residential premises.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Division 105, paragraph 40-65(2)(b).
Reasons for decision
Subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (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.
In this case you intend to sell the debtors property at auction to a third party, in or towards satisfaction of a debt that the debtor owes to you.
The properties being sold consists of a number of adjoining lots, all on separate certificate of title. Lot XX contains a residential dwelling which has been used for residential purposes since before 2 December 1998 and is therefore not new residential premises in terms of paragraph 40-65(2)(b) of the GST Act. Lot XY contains a non residential structure used for private purposes for storage. The other lots are vacant land and are said to be affected by the local environment and represent lands that cannot be built on and are merely curtilage to lots XX and XY.
Further, 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.
In your case the debtor did not provide you with a written notice that the supply would not be a taxable supply. Your enquiries have revealed that the debtor does not have an ABN and as such is not registered for GST.
Consequently 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 also consider that the land is residential in nature as it comprises a residence and other lots that form part of the curtilage for the residence.
Based on your advice that the debtor is not carrying on any enterprise there is no requirement for the debtor/mortgagor to be registered under section 23-5 of the GST Act.
As a result, you as the mortgagee in possession will not have any GST liability when you supply the property of the debtor entity to a third entity in or towards the satisfaction of a debt that the debtor owes to you.
Therefore, the exception in subsection 105-5(3) of the GST Act does apply, and the requirements of subsection 105-5(1) of the GST Act are not satisfied, and as such you are not making a taxable supply when you sell the real property of the debtor in or towards satisfaction of a debt owed to you. As a consequence you will not be required to remit 1/11th of the sale price of the property to the Tax Office.