Edited version of your written advice

Authorisation Number: 1051491943777

Date of advice: 11 March 2019

Ruling

Subject: GST and sale of property

Question

Did you make taxable supplies pursuant to section 105-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when the Properties, as detailed in the facts below, were sold in your capacity as mortgagee in possession?

Answer

No

Relevant facts and circumstances

You entered into a loan agreement with ABC Pty Ltd (the Borrower). The Borrower entered the agreement for the purpose of purchasing the properties.

You held a mortgage (Mortgage Registration Number AAxxxxx and AAxxxxx) over the Properties.

The Borrower is registered for GST and acquired the Properties between xx/xx/xxxx and xx/xx/xxxx for the purpose of residential development.

The Properties are pre-existing low-density residential houses but are currently zoned R4 High Density Residential. The Properties are neither commercial residential premises nor new residential premises as defined in the GST Act. The Properties are vacant and there is no intention to have them tenanted. However, the Properties remain habitable as residential houses despite being fenced off while vacant.

After the acquisition of the above Properties, as part of the Borrower's development enterprise, the Borrower engaged consultants and architects to prepare drawings and prepare reports and applied for a Development Application (DA) on the Properties with the relevant Council. The approved DA plan consists of the demolition of existing dwellings and construction of three residential buildings comprising of around xxx dwellings.

The DA Consent was granted on xx/xx/xxxx and is valid for 5 years from the endorsed date of Consent.

The Borrower marketed the completed dwellings for sale and has entered numerous off-the-plan pre-sale contracts with purchasers with bank guarantees and deposits received accordingly.

Before demolition and construction works were commenced, the Borrower experienced financial difficulties and you exercised the power to sell the Properties under section 58 of the Real Property Act 1900 (NSW).

You appointed Individual A and Individual B as joint and several Voluntary Administrators on xx/xx/xxxx. The Administrators took possession of the enterprise in their role of administrators. In addition, Individual C and Individual D were appointed as joint and several Receivers and Managers on behalf of the Administrator on xx/xx/xxxx.

The Administrators have been attempting to locate a purchaser to acquire the development enterprise including the DA approved Properties and to continue the development.

You, in your capacity as mortgagee exercising power of sale pursuant to registered mortgage numbers AAxxxxx and AAxxxxx, entered into a Contract for Sale with XYZ Pty Ltd for the sale and purchase of the Properties (including the DA).

The Contract for Sale was signed and exchanged on xx/xx/xxxx between the XYZ Pty Ltd and the Administrators acting on your behalf.

It is the intention that you will transfer all things necessary to enable the Purchaser to continue carrying on the property development enterprise. Together with the Properties, this would include:

● council DA approval

● architect drawings

● engineer reports and plans

● panel of planners and consultants

● all valid off-the-plan pre-sale contracts (to be assigned)

● all pre-sale bank guarantee/security deposits (to be assigned).

Relevant legislative provisions

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

Section 9-5

Section 40-65

Subsection 105-5(1)

Subsection 105-5(3)

Section 195-1

Real Property Act 1900 (NSW)

Section 58

Reasons for decision

Note: In this reasoning, unless otherwise stated,

● all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

● reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au

Subsection 105-5(1) states:

You make a taxable supply if:

(a) you supply the property of another entity (the debtor) to a third entity in or toward 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.

(An asterisk denotes a defined term in section 195-1 of the GST Act.)

However, subsection 105-5(3) provides that the supply will not be a taxable if:

● 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

● 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.

A reference to the term ‘taxable supply’ in paragraph 105-5(1)(b) and subsection 105-5(3) is a reference to the term as defined in section 9-5. Section 9-5 provides that you make a taxable supply if:

● you make the supply for consideration; and

● the supply is made in the course or furtherance of an enterprise that you carry on; and

● the supply is connected to the indirect tax zone (Australia); and

● you are registered or required to be registered for GST.

However the supply will not be a taxable supply to the extent the supply is GST-free or input taxed.

In this case you are making a supply of the Properties of the Borrower by exercising your right to sell the Properties under section 58 of the Real Property Act 1900 (NSW) and in accordance with mortgage/loan documentation (Mortgage Registration Number AAxxxxx and AAxxxxx).

The issue in this case is whether, if the Borrower had made the supply of the Properties, the supply would be a taxable supply. More specifically, the issue is whether the supply of the Properties is an input taxed supply.

Section 40-65 provides that the sale of real property is input taxed to the extent the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent the premises are ‘commercial residential premises’ or ‘new residential premises’ (other than those used for residential accommodation before 2 December 1998).

The term ‘real property’ is defined in section 195-1 and includes any interest in or right over land. The term ‘residential premises’ is also defined in section 195-1 as land or a building that:

● is occupied as a residence or for residential accommodation; or

● is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation.

Goods and Services Tax Ruling 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.

Paragraph 9 and 10 of GSTR 2012/5 explains the following:

9. The requirement in sections 40-35, 40-65 and 40-70 that premises be 'residential premises to be used predominantly for residential accommodation (regardless of the term of occupation)' is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation.

10. The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office).

Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities.

In this case the Properties consist of xxx separately titled residential dwellings and whilst currently vacant, all dwellings remain habitable as residential houses despite being fenced off. The Properties satisfy the definition of ‘residential premises’ for GST purposes. Furthermore, the Properties are neither ‘commercial residential premises’ nor ‘new residential premises’.

Conclusion

The supply of the Properties was an input taxed supply in accordance with section 40-65. Consequently, you have not made a taxable supply pursuant to section 105-5.