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Edited version of your written advice
Authorisation Number: 1013010020693
Date of advice: 13 May 2016
Ruling
Subject: GST and sale of equipment in satisfaction of debt
Question
Are you making a taxable supply when you sell equipment in part satisfaction of a debt owed to you by X?
Answer
Yes
This ruling applies for the following periods:
1 July 20XX to 30 June 20YY
Relevant facts and circumstances
You owned and ran a facility that was sold to a third party, X (the debtor). The contract was signed on Y and settlement occurred on Z. The facility was sold as a going concern and included plant & equipment valued at $X.
The sale price was $X. A vendor finance agreement was executed with security held over the Directors' residence.
With the business sold, you cancelled your ABN and GST registration.
The landlord of the premises who also had monies owing from the new owners (debtor) had locked them out of the premises. You were able to communicate with the landlord and negotiate to retain the equipment. In an attempt to recoup some lost funds from the default, you sold the equipment to a third party for $A. Our records reveal that the debtor was registered for GST at the time of your supply.
You have not received written notice from the debtor stating that the supply would not be a taxable supply if the debtor were to make it.
You are in legal proceedings to recoup monies owed from the security held over the residence of the Directors of X.
Relevant legislative provisions
A New Tax System (Goods and Services Tax) Act 1999 Section 105-5
A New Tax System (Goods and Services Tax) Act 1999 Section 9-5
Summary
You are making a taxable supply when you sell equipment in part satisfaction of a debt owed to you by the debtor due to section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).
Detailed reasoning
Division 105 of the GST Act contains special provisions about supplies in satisfaction of debts. This Division applies to supplies made by a creditor (which could either be a receiver manager, mortgagee in possession or a liquidator), of property belonging to a debtor, where the supply is in satisfaction of a debt owed to the creditor.
Subsection 105-5(1) of the GST Act 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 taxable supply.
Further, subsection 105-5(2) of the GST Act provides that it does not matter whether:
(a) you made the supply in the course or furtherance of an enterprise that you carry on, or
(b) you are registered or required to be registered.
In this case you meet section 105-5(1)(a) of the GST Act because you are selling the debtor's property to a third party, in or towards satisfaction of a debt incurred to you when the debtor failed to honour the finance agreement. Therefore we need to look at paragraph 105-5(1)(b) to see whether, had the debtor made the supply, it would have been a taxable supply.
The property being sold is equipment.
Section 9-5 of the GST Act provides that 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 the indirect tax zone; 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.
If the debtor had made the supply then it would have been a taxable supply as:
• the debtor was registered for GST
• The supply was made for consideration
• It was in the course of an enterprise that the debtor carried on
• The property was in the indirect tax zone and
• In addition there is no section of the GST Act that would make the supply of the debtor's equipment input taxed or GST free.
However, subsection 105-5(3) of the GST Act provides that 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.
You have not received written notice from the debtor stating that the supply would not be a taxable supply if the debtor were to make it and you do not believe on the basis of reasonable information that the supply would not be a taxable supply if the debtor were to make it.
Therefore, as the exception in subsection 105-5(3) of the GST Act does not apply, and the requirements of subsection 105-5(1) of the GST Act are satisfied, you are making a taxable supply when you sell the equipment of the debtor in or towards satisfaction of a debt owed to you.
ABN & GST registration
As you are making a taxable supply, you need to have an ABN and be registered for GST to report this in a BAS. You also need to issue a tax invoice to the recipient.