Edited version of your written advice

Authorisation Number: 1012896867428

Date of advice: 19 October 2015

Ruling

Subject: GST and refund of GST paid by the mortgagee in possession.

Question

Are you entitled to a refund of Goods and Services Tax (GST) paid by the mortgagees in possession in relation to the sale of your properties in satisfaction of debt?

Answer

No, you are not entitled to the refund of GST paid by the mortgagees in possession in relation to the sale of your properties in satisfaction of debt. Please refer to the reasons for decision.

Relevant facts and circumstances

• You borrowed money from a creditor to acquire properties for development.

• You acquired a property under the margin scheme for the development.

• The property was sold by the creditor as mortgagee in possession as a taxable supply without applying the margin scheme.

• The creditor reported the GST amount on the sale of the property in their business activity statement.

• You also reported the margin on the sale of this property believing that the property was sold under the margin scheme and you are liable to report the GST on the margin.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 - subsection 75-5(1) and (1A)

A New Tax System (Goods and Services Tax) Act 1999 - subsection 105-5(1) and (2)

A New Tax System (Goods and Services Tax) Act 1999 - section 105-20

Reasons for decision

Margin scheme

Under subsection 75-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), the margin scheme may only apply in working out the amount of GST on a taxable supply of real property if the supplier and recipient of the supply have agreed in writing that the margin scheme is to apply to the supply. The agreement must be made on or before the making of the supply, or within such further period as the Commissioner allows.

Under subsection 75-5(1A) of the GST Act, the Commissioner has the discretion to allow a further period of time, after the making of the supply, for the supplier and recipient of the supply to make the agreement in writing.

Other than satisfying the requirement of the written agreement, to apply the margin scheme you must be making a taxable supply by:

• Selling a freehold interest in land;

• Selling a stratum unit; or

• Supplying a long term lease.

In this case, you acquired the property under the margin scheme and based on the facts provided the property may be eligible for the use of the margin scheme when it was sold by the creditor as mortgagee in possession. However, the property was not sold under the margin scheme by the mortgagee in possession as per the statement of settlement.

You believed that the property should have been sold under the margin scheme by the mortgagee in possession as it was acquired by you under the margin scheme. Therefore, you believed that you are entitled to receive a GST refund from the ATO for the excess amount of GST reported by the creditor as mortgagee in possession in relation to the sale of the property.

As explained above, if the creditor wish to use the margin scheme to the sale of the property after the settlement, they are required to seek Commissioner's discretion under subsection 75-5(1A) of the GST Act.

The Law Administration Practice Statement PSLA 2005/15 sets out the circumstances in which the Commissioner may exercise his discretion under subsection 75-5(1A) of the GST Act. The discretion may be exercised where the Commissioner is satisfied that:

• all the requirements to apply the margin scheme, other than the requirement for the agreement in writing are met; and

• there is no arrangement that has the effect of producing an outcome contrary to the policy of the legislation.

The creditor is required to have written agreement with the purchaser of the property to enable them to use the margin scheme after the settlement. They may be entitled to amend their relevant business activity statement to report the correct GST amount only after they have obtained the Commissioner's discretion to apply the margin scheme and the written agreement with the purchaser.

Mortgagee in possession

Division 105 of the GST Act deals with supplies made by creditors of property belonging to a debtor, where the supply is in satisfaction of a debt owed to the creditor.

Subsections 105-5(1) and (2) of the GST Act state that 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 a taxable supply. It does not matter whether you made the supply in the course or furtherance of an enterprise that you carry on; or you are registered or required to be registered.

Section 105-20 of the GST Act provides that the mortgagee in possession is liable to pay the GST amount on the sale of a property under section 105-5 of the GST Act.

In this case, the creditor has made a taxable supply as mortgagee in possession by selling the property in satisfaction of the debt owed by you to them. They have also reported the GST amount on the sale of the property in their business activity statement as required by section 105-20 of the GST Act.

Therefore, it is the responsibility of the mortgagee in possession and in this case the creditor to decide whether they wish to apply the margin scheme on the sale of the property after the settlement and report the correct amount of GST by amending their business activity statement.

Furthermore, the mortgagee in possession sold the property under the relevant contract of sale with the purchaser as taxable supply without applying the margin scheme. Therefore, the sale of the property was a contractual matter between the mortgagee in possession and the purchaser. The Commissioner has no discretion to amend the business activity statement of the mortgagee in possession and to refund part of the GST amount paid by the mortgagee in possession, to you.

GST reported in error

You advised us that you have reported part of the sale of the property in your business activity statement. You believed that the property was sold under the margin scheme by the mortgagee in possession and therefore you are liable to report the GST on the margin.

If you believe that you have made an error in reporting part of the sale of the property in your business activity statement, you may be entitled to amend your business activity statement to correct the error.

Please refer to the link on "Correcting GST Errors" from the ATO website for assistance.