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Ruling

Subject: GST and sale of property

Question 1

Are you (ABC) making a taxable supply pursuant to subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you arrange the sale of Lots 1, 2 and 3?

Answer

No

Question 2

Are you (ABC) a representative for the purposes of Division 58 of the GST Act when you arranged the sale of Lots 1, 2 and 3?

Answer

Yes however you were not in control of the property at that time.

Relevant facts

ABC Fund registered a managed investment scheme under the Corporation Act 2001 and registered for GST.

Entity A registered as Responsible Entity (RE) for the managed investment scheme and is trustee for ABC Fund.

Entity A as trustee for ABC Fund will be known as ABC in this application and

Entity A as trustee for ABC Fund (receiver appointed) will be known as ABC (Receiver appointed).

Entity A as undisclosed RE for ABC Fund, entered into an agreement with Entity B in its own capacity and as trustee for the XYZ Unit Trust. That is the ABC Fund agreed to lend Entity B a specified amount. The agreement was entered into by Entity A however the funds were derived from the ABC Fund accordingly the loans were made by Entity A as undisclosed responsible entity for the ABC Fund.

Some relevant terms and conditions from the agreement are set out below:

· Clause XX provides that you agree to lend and advance a specified amount to Entity B.

· Clause XX sets out relevant default events

· Clause XX provides that upon any default the monies are immediately due and payable

· Clause XX sets out that:

The Borrower and Guarantor/ Security Provider irrevocably nominates, makes, appoints and constitutes the Lender and every person for the time being filling the officer of directors of the Lender and every Receiver appointed by the lender severally to be the lawful Attorney or attorneys of the Borrower and any Guarantor/Security provider for the sole benefit of the Lender (the Attorney)

· Clause XX provides ABC with a right of indemnity for any GST payable as a result of exercising the powers to sell properties owned by Entity B;

· Clause XX imposes an obligation on Entity B to comply with GST law and to indemnify you for any GST liabilities arising from transfer of your properties;

The following is a sequence of events in chronological order:

Entity B acquired a property and entered into a Development Management Agreement (DMA) with Entity C as Development Manager. From this development a number of lots were created including the properties in question.

A default notice was issued to Entity B in regards to the loan.

The Supreme Court ordered:

· Entity A be directed to wind up ABC pursuant to section 601ND of the Corporations Act 2001 (Corporations Act); and

· Entity D take responsibility for ensuring ABC is wound up in accordance with its constitution pursuant to section 601NF of the Corporations Act; and

· Entity D be appointed as a Receiver of the property of ABC for a 2 day period pursuant to section 1101B of the Corporations Act.

Two days later the Supreme Court ordered Entity D be appointed as a Receiver of the property of the ABC.

· The property to which Entity D was appointed receiver included the loans and securities, cash at bank together with the associated rights and obligations under the loans and securities held by ABC.

· Contracts which were on foot at the date of Entity D's appointment were allowed to be settled by Entity D as receiver of the fund in accordance with the contract terms.

Entity B through its duly authorised attorney, ABC (Receiver appointed), exchanged sale contracts for the following properties.

(a) Lot 1

(b) Lot 2

The loan agreement in its original form was stamped by the appropriate authority.

Lots 1 and 2 settled

The Supreme Court ordered Entity A be restrained from doing specified acts in relation to the operation of ABC including dealing with any property held or controlled by Entity A in its capacity as responsible entity of ABC or in its own capacity, other than in the ordinary and proper course of business.

Entity B, through its duly authorised attorney, ABC (Receiver appointed), exchanged the sale contract for Lot 3

ABC as mortgagee of the three properties received net proceeds of the sales after deductions of various priority costs.

Lot 3 settled.

Entity A was placed under voluntary administration and subsequently into liquidation.

Entity D was authorised to take all steps necessary to ensure realisation of property held by ABC.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999

Division 105

Section 105-5

Subsection 105-5(1)

Division 58

Section 58-5

Section 58-10

Subsection 58-10(1)

Section 58-95

Section 195-1

Corporations Act 2001

Section 9

Section 50AA

Section 51A

Section 86

Section 419

Reasons for decision

Question 1

Are you making a taxable supply pursuant to subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you arrange the sale of Lots 1, 2 and 3?

Division 105 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) makes a creditor liable for the GST on supplies of a debtor's 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.

The reference to 'you' in section 105-5 above is a reference to a creditor.

In this case, clause XX of the loan agreement provides that when Entity B borrowed funds from ABC, it irrevocably appointed ABC to be its lawful Attorney with powers including the power to execute a contract of sale, conveyance or transfer.

A power of attorney (POA) refers to the unilateral grant of authority by a Donor for someone else to act on their behalf akin to parties in an agency relationship. Goods and Services Tax Ruling GSTR 2000/37 Goods and services tax: agency relationships and the application of the law discuss the various types of agents and states at paragraph 19 that a universal agent is usually appointed by a POA.

Paragraph 11 of GSTR 2000/37 states:

For commercial law purposes, an agent is a person who is authorised, either expressly or impliedly, by a principal to act for that principal so as to create or affect legal relations between the principal and third parties.

However prior to you entering into the contracts for the sale of the properties, Entity D was appointed receiver over your property. Although the contracts show that you signed them as the attorney of Entity B and the property transfer forms for each of the transactions were signed by you, Entity D was in control of the properties and reviewed all the contracts that were on foot at that time and he ratified the sale contracts for the properties.

In this case neither ABC nor Entity D entered into the contractual process as a principal but as an agent of the principal Entity B.

As such, Division 105 of the GST Act will not apply to either you or Entity D.

Question 2

Are you (ABC) a representative for the purposes of Division 58 of the GST Act when you arranged the sale of Lots 1, 2 and 3?

Section 58-5 of the GST Act provides that a supply by a representative, in its capacity of a representative is taken to be a supply of the incapacitated entity. Section 58-10 of the GST Act assigns the GST amount on any taxable supply the incapacitated would be liable to pay to the representative to the extent that the supply was made within the scope of the representative's authority.

The terms 'representative' and 'incapacitated entity' are defined in section195-1 of the GST Act.

The term 'incapacitated entity' is defined as including an entity that has a representative. A representative is defined to include:

(a) a trustee in bankruptcy; or

(b) a liquidator; or

(c) a receiver; or

(ca) a controller (within the meaning of section 9 of the Corporations Act 2001); or

(d) an administrator appointed to an entity under Division 2 of Part 5.3A of the Corporations Act 2001; or

(e) a person appointed, or authorised, under an Australian law to manage the affairs of an entity because it is unable to pay all its debts as and when they become due and payable; or

(f) an administrator of a deed of company arrangement executed by the entity.

Based on your factual situation you do not meet the 'roles' set out in (a) to (c) or (d) to (f), therefore we need to look at whether you are 'a controller under section (ca) (within the meaning of section 9 of the Corporations Act 2001)'.

Section 9 of the Corporations Act 2001 (Corporations Act) defines a 'controller':

"controller" , in relation to property of a corporation, means:

a) a receiver, or receiver and manager, of that property; or

b) anyone else who (whether or not as agent for the corporation) is in possession, or has control, of that property for the purpose of enforcing a security interest;

and has a meaning affected by paragraph 434F(b) (which deals with 2 or more persons appointed as controllers) [emphasis added].

You do not fall within the scope of a receiver or receiver manager of the property of Entity B pursuant to paragraph (a) of the definition of 'controller'.

However in regard to the definition of 'controller' in paragraph (b) above, the term 'possession' is defined in section 86 of the Corporations Act as 'a thing that is in a person's custody or under a person's control is in the person's possession'.

Control' is defined in section 50AA of the Corporations Act as:

(1) For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity's financial and operating policies.

(2) In determining whether the first entity has this capacity:

a) the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

b) any practice or pattern of behaviour affecting the second entity's financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3) The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity's financial and operating policies.

(4) If the first entity:

a) has the capacity to influence decisions about the second entity's financial and operating policies; and

b) is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity's members;

the first entity is taken not to control the second entity.

Section 51A of the Corporations Act contains the meaning of 'security interest' and includes a charge, lien or pledge. A 'charge' is defined in section 9 of the Corporations Act as a charge created in any way and includes a mortgage and an agreement to give or execute a charge or mortgage, whether on demand or otherwise.

Given the above, we consider that you would have had control of the property of entity B in any general exercise of the POA under clause 25 of the CFD and would satisfy section 50AA of the Corporations Act and therefore would be a representative when exercising the POA.

However we consider that control of the property was not exercised by you (for the purpose of enforcing a security interest given that section 51A of the Corporations Act does not differentiate between a charge demanded or otherwise) because you were an incapacitated entity and had a receiver appointed over you.

We note that prior to exchanging the contracts for the sale of the relevant properties a receiver was appointed over your property and reviewed all the contracts that were on foot at that time and ratified the sale contracts for the properties.

The property of ABC Fund included the loans and securities, cash at bank together with the associated rights and obligations under the loans and securities held by you. This included the power of attorney as contained in clause 25 of the CFD.

Therefore we consider that you, under the POA were a representative of an incapacitated entity, entity B, under any general exercise of the POA. However the exchange of the contracts and completion of the supply of the lots were not within the scope of your control as a Receiver was appointed during that time.