• Legal database
Legal database
Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your private ruling

Authorisation Number: 1012476922846

Ruling

Subject: Sale of residential property

Questions:

    1. Is the proposed sale of the residential property a taxable supply?

    2. If so, can the margin scheme be applied to the sale?

Answers:

    1. No, the proposed sale of the residential property is not a taxable supply. It is an input taxed supply and therefore no GST is payable.

    2. Margin scheme can only be applied to work out the GST payable where the supply is a taxable supply.

Relevant facts and circumstances

    · You are the mortgagee in possession of a residential property.

    · You are registered for the goods and services tax (GST).

    · The mortgagor is also registered for the GST.

    · The mortgagor purchased the residential property from two individuals. To the best of your knowledge, the vendors of the property were not registered for the GST.

    · Consequently, the residential property was not supplied to the mortgagor as a taxable supply.

    · The mortgagor took possession of the property with an existing tenant.

    · As the mortgagor was unable to pay back the debt the mortgagor owes to you, you took possession of the property.

    · You intend to sell the residential property to a third party in or towards the satisfaction of the debt that the mortgagor owes you.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 9-5

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 40-65

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

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) - section 195-1

Reasons for decision

Supplies in satisfaction of debts

GST consequences of supplies in satisfaction of debts are dealt with in Division 105 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

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

    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 asterisked item is defined in the GST Act at section 195-1)

In this case you are the mortgagee in possession of the property and you are selling the property in or towards the satisfaction of the debt the mortgagor owes you. Therefore, the GST status of the sale of the property needs to be examined from the perspective of the mortgagor, as if the mortgagor is selling the property. Issue then is one of whether the sale of the property, had the mortgagor sold it, be a taxable supply.

Taxable supplies and input taxed supplies

Section 9-5 of the GST Act states:

    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.

Paragraph 9-30(2)(a) of the GST Act states that a supply is input taxed if it is input taxed under Division 40 or under a provision of another Act. Division 40 of the GST Act provides for supplies that are input taxed.

In this case the sale is that of a residential property, which the mortgagor had taken possession at its acquisition with a tenant in occupation. Subsection 40-65(1) of the GST Act states:

    A sale of *real property is input taxed, but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

Therefore the sale of the residential property will be an input taxed supply and not a taxable supply. Under Division 40, if a supply is input taxed, then no GST is payable on the supply. Consequently, no GST is payable on the sale of the residential property.

Margin scheme

Subsection 75-5(1) of the GST Act states 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.

It can be seen from the above that the margin scheme can be applied to work out the GST payable, among other requirements, only where the supply is a taxable supply. As the supply you will be making is input taxed, no GST is payable. Consequently the issue of margin scheme does not arise in this case.


Back to top