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Edited version of your written advice
Authorisation Number: 1012957034832
Date of advice: 4 February 2016
Ruling
Subject: GST and supplies in satisfaction of debts
Question
Are the supplies made by you taxable?
Answer
No, the supplies are not taxable.
Relevant facts and circumstances
You are making supples in satisfaction of debts.
You are registered for GST.
The defaulting borrower was registered for GST but had its GST cancelled about X years ago.
You obtained an Order for Possession.
You in your capacity as mortgagee in possession have not undertaken any development works other than to subdivide the land so that it could be realised.
You are selling the property which consists of a house and land.
The house is more than 5 years old and has not been the subject of extensive renovations within the last 5 years.
You are also selling a vacant lot.
The property had been used for livestock grazing for a number of years prior to you taking possession.
Since taking possession the whole of the property has been leased by you, until recently, with the tenant grazing livestock on the property.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999
section 9-5
section 23-5
subsection 105-5(1)
section 188-25
section 195-1.
Reasons for decision
Subsection 105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that a mortgagee in possession will make a taxable supply of the property if:
• the mortgagee supplies the property of another entity (the mortgagor) to a third entity in or towards the satisfaction of a debt that the mortgagor owes to the mortgagee; and
• had the mortgagor made the supply, the supply would have been a taxable supply.
You, as the mortgagee in possession of the property under a court order, are making the supply of the property to satisfy a debt owing to you by the debtor. Therefore, in this case, it is necessary to determine the GST status of this supply had the debtor made the supply to the purchaser.
An entity makes a taxable supply under section 9-5 of the GST Act if it makes the supply for consideration; the supply is made in the course or furtherance of an enterprise that the entity carries on; is connected with the indirect tax zone and the entity is registered, or required to be registered.
For a supply to be taxable all the elements mentioned above have to be present.
However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.
Section 23-5 of the GST Act provides that an entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold.
The registration turnover threshold is currently $75,000.
Section 195-1 of the GST Act stipulates that carrying on an enterprise includes doing anything in the commencement or termination of an enterprise.
Section 188-25 of the GST Act excludes certain supplies made when working out an entity's projected GST turnover. Section188-25 requires an entity to disregard the following when calculating its projected GST turnover:
(a) any supply made, or likely to be made, by the entity by way of transfer of ownership of its capital assets; and
(b) any supply made, or likely to be made, by the entity solely as a consequence of:
(i) ceasing to carry on an enterprise; or
(ii) substantially and permanently reducing the size or scale of an enterprise.
An entity's projected GST turnover does not include supplies that fall within the description in either paragraph 188-25(a) or paragraph 188-25(b) listed above. The supply does not have to satisfy the descriptions in both paragraph (a) and paragraph (b). When an entity makes a supply that is capable of satisfying the description in both paragraphs, the supply is excluded only once.
The mortgagee has not been registered for GST for about five years. The information available also does not indicate that the mortgagee was required to be registered for GST. Therefore, had the mortgagee made the supply of the property section 188-25 of the GST Act would prevent the supply to form part of their projected GST turnover and they would not be required to be registered for GST.
Consequently, when you supply the mortgagee's property to a third entity in or towards the satisfaction of a debt that they owe the supply would not be a taxable supply.
This means that the supply would not attract the GST.