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Ruling
Subject: Transfer of title to property for no consideration
Question:
Does the supply of premises constitute a supply for consideration under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), where a title is transferred by Entity B under the direction of Entity A to itself or another entity, due to a breach of the agreement by the Entity B?
Answer:
No, the supply of land and premises does not constitute a supply for consideration under section 9-5 of the GST Act, where title is transferred under the direction of Entity A to itself or another entity, due to a breach of the agreement by Entity B.
Relevant facts and circumstances
Project Agreement
The agreement provides for the project and the interest in the premises. Entity B charges the land with the performance of its obligations under the agreement to grant to Entity A a mortgage over the premises in order to secure the performance of Entity Bs obligations under the agreement.
As security for the performance of the Entity Bs obligations they must transfer ownership of the premises to Entity A by delivering to Entity A a registrable transfer of the premises in favour of Entity A duly executed by Entity B which may be used by Entity A to re-convey the premises to itself or an alternative entity under the terms of the agreement.
Furthermore, the agreement provides that if Entity A exercises its option Entity B shall immediately on receipt of instructions from Entity A and at its own cost effect the transfer of legal ownership of the premises. There is no consideration provided to Entity B by Entity A for the transfer.
With this situation there are no further agreements and no court action involved.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 - Section 9-5.
Section 9-10
Reasons for decision
A supply is taxable where section 9-5 of the GST Act is satisfied. This section provides that:
You make a taxable supply if:
· you make the supply for consideration,
· the supply is made in the course or furtherance of an enterprise that you carry on,
· the supply is connected with Australia,
· 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.
Meaning of supply is given in section 9-10 of the GST Act.
This section provides that the meaning of supply is any form of supply whatsoever and includes such things as a grant, assignment or surrender of real property, a creation, grant, transfer, assignment or surrender of any right, or an entry into, or release from an obligation to do anything.
Under the agreement it provides that Entity B grants Entity A a mortgage over the land and premises to secure the performance of their obligations under the agreement and as further security Entity B provides to Entity A executed transfer documents for the premises which may be used by Entity A to re-convey the premises in the event of a breach under the agreement.
The agreement also provides that where there is a breach under the agreement Entity B may take action without further notice such as transferring ownership of the premises to another entity at its discretion or transferring ownership to themselves. Alternatively, Entity A may exercise its option to instruct Entity B at its own cost to effect the transfer of legal ownership of the premises to itself or another entity.
In this circumstance, as a consequence of a breach Entity A has directed Entity B to transfer title to the premises pursuant to the agreement to bring the agreement to an end.
As Entity B is required to take some action to transfer the title to the premises they make a supply of real property. However, Entity A does not provide any consideration for the transfer of title to the premises.
Therefore, in this circumstance there is not the required nexus between a supply for consideration. Hence, the first requirement of section 9-5 of the GST Act is not satisfied and the supply will not be taxable.