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Ruling

Subject: GST and acquisition from a mortgagee

Question

Are you entitled to input tax credit on your purchase of the Property from the Mortgagee?

Answer

No.

Relevant facts

You are a corporate entity carrying on a land development enterprise and registered for GST.

You are the registered owner of a vacant block of land in Australia (Property).

A number of years ago, you mortgaged the Property. This is a standard fixed mortgage (interest only) commencing in 2009 and due in 2010.

You defaulted on the loan and warrant of possession (in favour of the Mortgagee) was issued.

You were not able to negotiate a repayment of the monies owing and was forced to purchase the property at auction.

The Mortgagee sold the Property to A &/or nominee.

You appointed A as your attorney (general powers).

It was always intended that the Property would stay in your name through nomination.

A nominated you as the substitute purchaser.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-10.

A New Tax System (Goods and Services Tax) Act 1999 Division 58.

A New Tax System (Goods and Services Tax) Act 1999 Section 58-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 58-10.

A New Tax System (Goods and Services Tax) Act 1999 Division 105.

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

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are entitled to an input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act states:

You make a creditable acquisition if:

· you acquire anything solely or partly for *creditable purpose; and

· the supply of the thing to you is a *taxable supply; and

· you provide, or are liable to provide, *consideration for the supply; and

· you are *registered, or *required to be registered.

(*denotes a term defined under section 195-1 of the GST Act)

One of the requirements for you to make a creditable acquisition is for the supply to you to be a taxable supply.

Whether the supply to you is a taxable supply

Whether or not a supply is a taxable supply depends on the circumstances of the supplier. A supplier will make a taxable supply if all of the requirements of section 9-5 of the GST Act are met.

Section 9-5 of the GST Act states:

You make a taxable supply if:

· you make the supply for *consideration; and

· the supply is made in the course or furtherance of an *enterprise that you *carry on; and

· the supply is *connected with Australia; and

· 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.

A supply is defined in section 9-10 of the GST Act as any form of supply whatsoever, without limiting but including a grant assignment or surrender of real property. The term refers to things passing from one party to another.

Goods and Services Tax Ruling GSTR 2006/9 explains the meaning of the term 'supply' in the GST Act. Part 2 of ruling focuses on the characteristics of 'supply' in the context of a two party transaction and discusses ten propositions that are considered relevant in analysing a transaction in relation to a supply. Part 3 of the ruling discusses six further propositions which also apply to analysing more complex multi-party arrangements.

The substitution of a nominee as purchaser is not a complex multi-party arrangement.

In this case, of relevance is Proposition 7 under paragraphs 95 to 98 of GSTR 2006/9 which states:

Proposition 7: an entity cannot make a supply to itself

95. The proposition that an entity cannot make a supply to itself flows from the proposition 'supply usually, but not necessarily, requires something to be passed from one entity to another'. It also seems self evident in a transaction based tax.

In your case, as the sale of the Property is made by the Mortgagee exercising its power of sale, it falls for consideration under Divisions 58 and 105 of the GST Act.

It is ATO policy as set out in ATO Interpretative Decision ATO ID 2010/224 that Division 105 of the GST Act operates to the exclusion of Division 58.

Where a mortgagee in possession supplies property belonging to a debtor in satisfaction of a debt, the mortgagee in possession is liable for the GST under the provisions of Division 105 of the GST Act.

Subsection 105-5(1) of the GST Act states:

You make a taxable supply if:

· 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

· had the debtor made the supply, the supply would have been *taxable supply.

Where a debtor is a corporate entity, the mortgagee in possession is a 'representative' and the debtor is an 'incapacitated entity' for the purposes of Division 58 of the GST Act.

Under section 58-5 of the GST Act, any supply by a representative of an incapacitated entity is considered for GST purposes to be a supply by the incapacitated entity.

Under section 58-10 of the GST Act, a representative of an incapacitated entity is liable to pay any GST that the incapacitated entity would be liable to pay on a taxable supply to the extent that the making of the supply to which the GST relates is within the scope of the representative's responsibility or authority for managing the incapacitated entity's affairs.

The Mortgagee entered into the agreement to sell the Property to A, at this point in time:

The circumstances are consistent with the description of each of the ten propositions in Part 2 of GSTR 2006/9. That is, there is a supplier, the supplier does something to effect the supply, something is supplied and there is a recipient.

The provisions of Division 105 of the GST Act apply to the supply. That is, the Mortgagee makes the supply of the Property to a third party in satisfaction of a debt.

In addition, the provisions of Division 58 of the GST Act would apply, but for the ATO policy set out in ATO ID 2010/224, as the debtor is a corporate entity and the Mortgagee is a representative for the purposes of Division 58.

The parties to the sale of the Property agreed to the substitution of you as purchaser. That is, the Mortgagee agrees to sell the Property to the entity that holds title to the Property. At this point in time:

The provisions of Division 105 of the GST Act do not apply to the supply as the Mortgagee is no longer making a supply of the Property to a third party.

As Division 105 does not apply, the applicability of Division 58 needs to be considered. Under section 58-5 of the GST Act, supplies by a representative are taken to have been made by the incapacitated entity. In this case, you as the incapacitated entity is taken to be making a supply to you, the substituted purchaser. As outlined in Proposition 7 of GSTR 2006/9, there is no supply in this instance as one cannot make a supply to oneself.

Accordingly, the sale of the Property to you by the Mortgagee is not considered a taxable supply as there is no supply for consideration as required under paragraph 9-5(a) of the GST Act.

Since the requirements of section 11-5 of the GST Act are not satisfied, you are not making a creditable acquisition. Therefore, you are not entitled to an input tax credit.