Edited version of your written advice

Authorisation Number: 1012983455123

Date of advice: 16 March 2016

Ruling

Subject: GST and the sale of real property by a mortgagee in possession

Question

Will the supply of the specified Lots located in Australia (the Lots) by Company A (mortgagee in possession) through their agents, be a taxable supply pursuant to section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes. Under section 105-5 Company A has made a taxable supply of the Lots through you, as their agents.

Relevant facts and circumstances

In 200X, Company B as trustee for (atf) Trust A acquired the Lots.

Trust A obtained finance and development approval for the development of new residential premises on the Lots.

Trust A began development of the Lots after registering for GST. Trust A demolished the buildings on site and proceeded to prepare the site for development. However the development was not completed as a result of a dispute with the project manager and ceased in 201X.

On ddmmyyyy Company C was registered for GST.

In 201Y Company C and three other entities including Company D borrowed $XX.XX from Company A and a mortgage was secured over the Lots.

The details of the mortgage are set out in mortgage memorandum ABCDEF. You supplied a sample mortgage memorandum document.

In mmyyyy the Lots were transferred from Company B to Company C. The transfer was done pursuant to section 54(3) of the Duties Act 1997 (Duties Act) of the relevant state. This section of the Duties Act is titled Change in Trustees. Title searches confirmed that the Lots were registered in the name of Company C after the transfer. Trust A retained beneficial ownership of the Lots and that Company C replaced Company B as trustee of Trust A.

Receivership

Trust A defaulted on its repayments under the mortgage. On ddmmyyyy Receivers and Managers were appointed over the Lots held by Company C as trustee for Trust A pursuant to the registered charges held by Company A. The appointment was under a document titled Deed of Appointment of Receivers and Managers (the Deed of Appointment).

Under the Deed of Appointment the secured party is Company A and the secured property is the Lots.

Clause X of the Deed of Appointment provides that:

The Secured Party has requested that the Receiver accept an appointment to act jointly and severally as receivers and managers of the security Property.

Clause Y of the Deed of Appointment provides that:

To the extent allowed by law, the Receivers are agent of the Borrower and the Borrower alone is responsible for the Receivers acts and defaults.

Deed of Agent of the Mortgagee Indemnity

On ddmmyyyy you entered into a Deed of Agent of the Mortgagee Indemnity (Indemnity Deed). Your agent advised that this appointment was made because it gave the mortgagee greater powers to affect the sale.

Under the Indemnity Deed:

The Secured Party is Company A

The Secured Property is the Lots

Clause C of the Indemnity Deed provides that:

The Secured Party has requested that the Agents accept an appointment to act jointly and severally as Agents of the Mortgagee of the Secured Property.

Clause D provides that:

The Agents have agreed to accept the above referred to appointments on condition that the Secured Party indemnify the agents (so far as the Secured Party is legally able to do so) in the manner provided in this Deed.

You began marketing the Lots for sale on an 'as is/where is basis'. You did not continue with any of the previous development work prior to its ultimate sale in X 201X.

You as agents for Company A engaged an auctioneer to sell the Lots on the ddmmyyyy and you supplied us with a copy of the engagement documentation titled Sales Inspection Report and Exclusive Agency Agreement.

On ddmmyyyy the Lots were sold in one row as a partly completed development site.

The vendor was shown in the sales documents as Company A exercising power of sale pursuant to the Mortgage ABCDEF. Settlement occurred on ddmmyyyy and a tax invoice was issued by Company A to the purchaser.

The supply was a taxable supply with full GST payable.

Company C as trustee for Trust A did not give you any notice stating that the supply would not be a taxable supply and you believe that the supply would have been a taxable supply.

The sale was treated as a fully taxable supply without any application of the margin scheme.

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 29-5,

A New Tax System (Goods and Services Tax) Act 1999 Section 29-10,

A New Tax System (Goods and Services Tax) Act 1999 Division 58,

A New Tax System (Goods and Services Tax) Act 1999 Division 105,

A New Tax System (Goods and Services Tax) Act 1999 Division 153 and

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

Corporations Act 2001 Section 9

Reasons for decision

Background

Trust A registered for GST and began developing the Lots however it ceased development as a result of a dispute with the project manager. On ddmmyyyy Company C was registered for GST and on mmyyyyy the Lots were transferred to Company C pursuant to subsection 54(3) of the relavent states Duties Act 1997.

We consider that based on the transfer documentation and your agents submissions that this transfer was merely a change in trustee and that there was no change in beneficial ownership.

On ddmmyyyy, you were appointed Receivers and Managers of Company C pursuant to the registered security interest held by Company A over the Lots.

On ddmmyyyy you were appointed as agent for the Mortgagee, pursuant to a Deed of Agent of the Mortgagee Indemnity. Your appointment continued until ddmmyyyy.

Following this appointment you as agent for Company A began marketing the Lots.

On ddmmyyyy Company A exercising its power of sale sold the Lots as a taxable supply.

Reasoning

Division 58 sets out how to ascribe activities of a representative of an incapacitated entity between the representative and the incapacitated entity for GST purposes. Section 195-1 provides that a representative includes a receiver and an incapacitated entity is defined to include an entity that has a representative.

As of ddmmyyyy you were appointed as Receivers and Managers over the Lots, being the secured property held by Company C as trustee for Trust A. As a receiver falls within the definition of representative in Division 195, you are a representative of Trust A and Trust A meets the definition of an incapacitated entity. Trust A was registered for GST. Therefore you will be required to report any supplies and acquisitions within the scope of your authority or responsibility as Receiver and Managers under the ABN of Trust A except the supply of the Lots for the reasons explained below.

On ddmmyyyy you accepted an appointment to act jointly and severally as agents of the mortgagee in possession of the Lots, which were the partially developed property of Trust A. The definition of representative also includes a controller (within the meaning of section 9 of the Corporations Act 2001). The main part of the definition of 'controller' in section 9 of the Corporations Act 2001 is as follows:

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 charge…

A mortgagee in possession meets the definition of controller in section 9 of the Corporations Act 2001 and is therefore also a representative for Division 58 purposes.

Company A in its capacity as mortgagee in possession (exercising its power of sale pursuant to registered mortgage) sold the Lots through you as agent by auction and its name was recorded on the sale documentation. That is, Company A (the principal) has made a supply of the Lots through you as agent, rather than through you in your capacity as representative of Trust A. Therefore, Division 58 has no application to you as Receivers and Managers in relation to the supply of the Lots.

GSTR 2000/37 Goods and services tax: agency relationships and the application of the law (GSTR 2000/37) describes what is meant by principal/agent relationships. Specifically, paragraph 20 of GSTR 2000/37 states where a principal makes a taxable supply or a creditable acquisition through an agent, the GST payable by the principal or the input tax credit to which the principal is entitled would be attributable to the basic attribution rules set out in sections 29-5 and 29-10 unless a special attribution rule applies. That is, the principal accounts for any GST for any taxable supplies the agent makes on their behalf unless the rules in Division 153 apply.

Division 105 makes a creditor liable for GST on supplies of a debtor's property where the supply is in satisfaction of a debt owed to the creditor.

Subsection 105-5(1) provides that 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.

However subsection 105-5(2) provides the supply is not a taxable supply if:

a) the debtor has given you a written notice stating that the supply would not be a taxable supply if the debtor were to make it, and stating fully the reasons why the supply would not be a taxable supply or

b) if you cannot obtain such a notice - you believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.

As set out in the Deed of Appointment, the debtor, Trust A, defaulted under the terms of the mortgage and the creditor, Company A, appointed you as agent to arrange the sale of the property of Trust A in satisfaction of a debt owed to Company A.

If Trust A had instead made the supply of the Lots it would have been a taxable supply pursuant to section 9-5 as:

a) the supplies of the Lots were made for consideration;

b) the supply was in the course or furtherance of a property development enterprise being carried on;

c) the Lots were located in the indirect tax zone;

d) Trust A was registered for GST; and

e) the supplies were not GST-free or input taxed.

You have advised that you believe the supply of the Lots is a taxable supply and that the debtor Trust A has not given you (as agent for Company A) a notice stating that the supply is not a taxable supply.

Therefore, when Company A as mortgagee in possession sold the Lots (through you as agent), section 105-5 applied to Company A, as Company A made a taxable supply of those Lots when it supplied the property of Trust A in satisfaction of the debt Trust A owed to Company A. The exemptions in paragraphs 105-5(2)(a) and (b) do not apply.

Both Division 58 and Division 105 may apply to Company A in relation to the supply of the Lots, however section 58-95 provides that Division 58 does not apply to the extent that paragraph 105-5(1)(a) will apply to a supply by the representative (in this case, Company A) of the entity's (Trust A's) property.

Therefore, Company A is liable for GST on the taxable supplies of the Lots under section 105-5. As Company A is registered for GST it may report the supply under its own ABN.