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Edited version of your written advice
Authorisation Number: 1012847071109
NOTICE
The private ruling on which this edited version is based has been overturned on objection.
This notice must not be taken to imply anything about the correctness of other edited versions.
Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases
Date of advice: 24 July 2015
Ruling
Subject: GST and the supply of an interest in a debt
Question
Is the sale of the management agreements by seller an input taxed financial supply of an interest in a debt under item 2 of the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999?
Answer
No, the sale of the management agreements is not an input taxed supply, it is a taxable supply.
Relevant facts and circumstances
The seller has management agreements with individuals.
The management agreements provide that the individuals are required to pay various fees and charges and that the manager is required to provide various services and has various obligations.
The seller has entered into a contract for the sale of the management agreements.
Under the contract of sale, the management agreements are assigned to the buyer:
From Completion:
(a) the Seller assigns to the Buyer the benefit and to the extent it is able the burden of:
(i) …
(ii) the management agreements;
(b) the buyer must comply with the terms of the management agreements; and
(c) the buyer acknowledges and agrees that the benefit and obligation of the seller:
(i) …
(ii) under the management agreements may be transferred to the buyer
are binding on the buyer as the manager as if the buyer were a party to management agreements.
The seller is registered for GST, the sale is in the course or furtherance of an enterprise carried on by the seller and the sale is connected with the indirect tax zone.
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 40-5
A New Tax System (Goods and Services Tax) Regulations 1999 subregulation 40-5.09(3)
Reasons for decision
A financial supply is input taxed under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). The provision, acquisition or disposal of an interest mentioned in the table in subregulation 40-5.09(3) of the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) is a financial supply if it is for consideration; made in the course or furtherance of an enterprise; is connected with the indirect tax zone; and the supplier is registered for GST.
Item 2 of the table in subregulation 40-5.09(3) of the GST Regulations provides that the supply of an interest in a debt is a financial supply. For the purposes of item 2, Goods and Services Tax Ruling, Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions GSTR 2002/2 defines 'debt' as:
An amount due from one entity to another or a presently existing obligation to pay an ascertainable amount at a future time.
However, paragraph 22 of Goods and Services Tax Ruling, Goods and services tax: assignment of payment streams including under a typical securitisation arrangement GSTR 2004/4 explains:
22. Subregulation 40-5.09(3) deals with interests in or under debt. The term interest, in relation to debt, extends to an existing contractual right to a debt that will arise in the future.
Under the management agreement, the individual is required to pay certain amounts to the manager, these include:
• the monthly Charge;
• the Provision for Major Maintenance (which is held on trust by the manager for the purpose of structural repairs of and maintenance to the communal areas facilities and maintaining the exterior of units);
• the Deferred Payment (retained by the manager)
As explained at paragraph 30 of GSTR 2004/4, an effective legal or equitable assignment of a right to all or part of a payment stream will be the supply of an interest in or under a debt which is a financial supply under item 2 of the table in subregulation 40-5.09(3) of the GST Regulations. Paragraph 34 of GSTR 2004/4 explains that a distinction must be made between the assignment of an interest in a payment stream and the assignment of underlying property from which the payment stream arises:
34. It is necessary in some cases to distinguish the assignment of underlying property from the assignment of a payment stream arising from the property. For example if the owner of a building that is leased sells real property in the form of the freehold in the building, to another person subject to the existing lease (the reversion), the purchaser will be entitled to the rent from the building as its owner. In an abstract sense it can be said that the former owner has assigned the right to rent but it is not an assignment of the rental stream in the sense that is generally understood in the law when referring to assignments of rights to payment streams (Mason CJ in Booth).
The management agreement is a contract whereby the manager provides services and has certain obligations and the individual pays for those services. The management agreement provides that in consideration of the payment of the monthly charge, the manager agrees to provide the services to the individual.
A schedule to the management agreement provides a list of the services provided by the manager under the contract. Furthermore, the management agreement provides that the manager will undertake various duties in addition to the granting to each individual a specific licence.
It is clear that the payments by the residents under the management agreement arise because of the supplies of services and rights made by the manager to each individual. The contract of sale clearly requires the buyer to continue to supply those same services and rights to each individual.
The contract of sale transfers the legal ownership of the underlying property rather than the interest in a debt. The buyer will become the supplier of the services and rights under the management agreement. The buyer will be entitled to be paid the fees as outlined in those agreements in return for its supplies.
Consequently, the sale of the management agreements by the seller is not the supply of an interest in a debt as specified in item 2 of the table in subregulation 40-5.09(3) of the GST Regulations. As the sale of the management agreements is not a financial supply, it is not input taxed under section 40-5 of the GST Act.
As all of the requirements of section 9-5 of the GST Act are satisfied, the sale of the management agreements is a taxable supply.